The news that, on average, superannuation investments lost nearly 20 per cent of their value last year comes as no surprise, and its likely that there are plenty of unrealised losses still on the books.
Still, while the losses on the stockmarket have been as bad here as anywhere, we can take some comfort in the fact that Australian superannuation funds, like Australian banks, don’t seem to be in the same trouble as some of their overseas counterparts. As the government scrambles to keep the financial system operational, it’s natural to ask what, if anything can be done about this.
In the short term, the answer appears to be, nothing, or very little. Fortunately, for most people the losses are, in a sense, notional, wiping out the spurious gains of previous years. It’s only for those at or near retirement that the crash presents an immediate economic problem. Given that the demand for labour is plummeting, the government could perhaps consider an ex gratia payment to people who choose to retire now. There are all sorts of problems with this, and in normal times, such a proposal would never pass muster, but plainly, these aren’t normal times.
Looking to the longer view, this is more than a bad year for superannuation funds. The crash and the way it came about undermines the fundamental premise that has driven Australian retirement income policy for the past decade: that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers to personal accounts, is the best way of financing retirement. The old age pension, in this view, serves as a residual for those who don’t manage to save enough.
This privatised approach (also represented in Bush’s failed attempt to reform Social Security in the US) is has been largely discredited by the crash. Financial advisers, even the honest ones, have proved to be useless. Lots of investments that were marketed as low-risk have turned out to be little more than junk. Morover, the idea that stocks will always perform better than bonds over the medium term (say a decade) has been proved false. This is a central premise of long-term investment advice.
We need to look again at the alternatives: either a return to employer-based defined benefit schemes, with portability of service, or some kind of national superannation schemes. In the short term, the call for an increase in the aged pension will also gain strength.
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The only comment that this article warrants is that crikey should know better than to publish such twaddle.
Only 20%? I took over the management of my super in Jan last year and the first thing I did was sell all my shares and put the whole lot in the bank. I did that because in the 6 months to 31 Dec ’07, my Aviva “professionally managed super fund” (a truly balanced portfolio) had lost 25% in value and cost me $250 a month for the privilege. I received no updates throughout the period, no explanation as to the reasons for the poor performance, no suggestions as to whether I should adjust my holdings and no phone call when I advised that I was terminating their serives.
Chris Cornish has unrealistic expectations of Crikey.
I empathise. I once felt the same way.
However all the evidence points the way of “twaddle”
Adam Smith (hey, similar name) the figures you quote of 6.93% vs 6.16% actually prove the author’s point. He may have been wrong in his actual wording, but if you read into what he meant then he is correct. Actual performance figures are not the only way to measure of ‘performance’. Any investor worth their weight in scrip knows that it is a tradeoff between risk and return. The slight difference of 0.73% quoted by you shows that the much higher risk equities has only slightly outperformed the mush lower risk bonds over a decade. That is disgusting considering the risk/return ratio.
Actually, if proper research was done, you would discover that the 10 year return for the Australian equities market (S&P/ASX 300 Accum Index) to 31 December 2008 was 6.93% p.a. versus the Australian bond market (UBS Composite All Mats) was 6.16% p.a.
Perhaps the premise of long term investment advice is a little sounder that you think….
Try an examination of the impact employer based DB schemes would have on corporate stability (hence employement and retirement outcomes) in market downturns such as these…