Super Revolt Gaining Pace
November 1st, 2012
It could well be dubbed the super revolution. Close to half a million Australians have opted out of the professionally managed superannuation industry and taken matters into their own hands.
Disillusioned by 20 years of poor returns and exorbitant fees, many have decided they would be better off doing it themselves, a trend that has begun to strike fear into the hearts of those who rake off about $18 billion a year in fees.
The Australian Taxation Office says there are now 478,000 self-managed super funds. And their numbers are swelling. The latest data shows an 8 per cent lift on last year and 15 per cent more than in 2010.But they carry far greater weight than the sheer force of numbers. While those managing their own super make up about 10 per cent of the superannuation pool by headcount, the amount of money they control adds up to 32 per cent of the national pool.
Once the domain of small and medium-sized business owners, self-managed super is attracting ordinary workers in their droves. Almost a quarter of these funds have less than $200,000, well below the $300,000 threshold often considered the minimum to make self-run super cost effective.
The Australian Prudential Regulatory Authority estimates that, of the total $1.4 trillion in national savings, $439 billion now is being self-managed.
Not only does that make DIY super the fastest-growing segment of the industry, it is now far and away the biggest component of our super savings.
Industry funds - those run by the union movement and normally considered the heavyweights of the industry - account for just $266 billion. Public sector funds control $222 billion and corporate funds have $55 billion. Technology is another force driving the revolution. Australians now have access to more than 60 exchange-traded funds on the local stock exchange. Want to invest in gold, have access to the Chinese market or dabble in debt securities? The less adventurous can buy shares in a fund that mirrors the performance of the top companies on the Australian market or market sectors. With a relatively small outlay, you can build an instant portfolio.
And it can all be done with a simple click on your home computer or smartphone for a fraction of the cost.
At some point, these forces will cause a massive shake-up in super. So far, though, little seems to have changed.
Given the extraordinary amount of money now leaving the professionally-managed segment, total fees should have plummeted for the simple reason that self-managed funds have the lowest costs. That hasn't happened.
The percentage fee take-out of the super pool has only inched lower, despite the abysmal performances of many funds in the past five years.
Government meddling with super is another key issue.
Ever since mandatory super was introduced in 1991, governments of all persuasions have tinkered with the system, and particularly the way super is taxed. Depending on the government's electoral cycle, it alternates between being viewed as a milch cow or pork barrel.
In recent years, voluntary contributions to super at concessional tax rates have been capped, initially at $100,000, then halved to $50,000 and halved again to $25,000. In the most recent Budget, those earning more than $300,000 a year were to pay 30 per cent tax on contributions, compared with 15 per cent for everyone else.
This dizzying round of continual change, sometimes with retrospective elements, has undermined confidence in the system and reinforced a government view that super is a political weapon rather than a long-term savings mechanism.
One of the reasons for this continual meddling is the way super is viewed by the federal bureaucracy. Rather than being housed in the Department of Labour and Industry, it sits in Treasury, where it mostly is viewed as a cost, particularly in terms of foregone tax revenues.
That foregone tax is significant. With the 15 per cent concessional tax rate on contributions, it could be argued the Federal Government contributes $30 billion a year in tax concessions. That is more than the defence budget.
Given the negative rate of return from most funds - which prefer to focus on the number of investment options they offer rather than performance - Treasury officials view the industry as wasteful. Most bureaucrats and politicians have the luxury of being on defined benefits schemes where, upon retirement, they will receive a large slab of their current salary for the rest of their lives, indexed for inflation, of course.
The rest of us have no such luxury, confined to a system that has defined contributions with no certainty of benefits and insufficient resources to see us through retirement.