As revealed by The Australian Financial Review, it is now weighing up a scheme that would channel the almost half a million new workforce entrants each year – with their $1 billion in initial super contributions – into a government-run fund.
This new fund would rely on the expertise of the government-owned $149 billion Future Fund to make the high level decision on asset allocation – how much money, for instance, it should put into equities, and how much into bonds or property.
Government officials would then run a competitive tender process to select which asset managers should be given the mandate to invest the money.
This approach essentially mirrors what already happens at the Future Fund, which decides how much of its money should be held in various asset classes, and then outsources the actual investment decisions to external fund managers.
Although the government imagines that industry and retail super funds would compete head to head with specialist investment managers to manage the funds in the default plan, seasoned industry players see this as unlikely.
The argue that retail and industry super funds – most of which themselves rely on specialist investment managers to invest their funds – would almost certainly turn out to be superfluous.
Instead, they say, the government-owned default super plan is likely to follow the Future Fund model and select a number of specialist funds managers – the Magellans and Platinums and BlackRocks of the world – to directly invest its funds.
Now, there’s no doubt that such a super scheme is eminently workable and that new entrants to the workforce could look forward to respectable returns on their retirement savings.
And it’s much better than the other scheme presently being mulled by the government, which involves allowing the Future Fund to set up a new consumer fund that would compete for members with retail and industry super funds.
(That’s because the government-owned Future Fund would enjoy a huge and unfair competitive advantage over its rivals. Millions of Australians would shift their super savings into the Future Fund, assuming that the government would stand behind the fund and ensure that they never lost money. Whenever equity markets suffered a dismal year, angry fund members would put huge pressure on the government to top up their super which would cost taxpayers dearly.)
Still, it’s far from clear that the Morrison government has thought through the full consequences of making this momentous decision to effectively nationalise super.
Retail and industry funds to atrophy
In the first place, there’ll be major consequences for the industry. Existing retail and industry funds will atrophy as the contributions of new workforce entrants flood into the new government-run scheme. With little hope of attracting new members, existing funds will be relying on the inertia and indifference of their members to keep their doors open.
But over the longer term, even apathy won’t be enough to save them. They’ll suffer an ongoing outflow of funds as their existing members reach retirement age, and withdraw their super savings from the fund.
As their membership numbers and funds under management dwindle, trustees will be faced with the difficult decision of whether they should increase fees and charges to cover the relatively fixed operating costs, which will whittle down their members’ retirement savings.
The other obvious effect will be on the government itself, because it will inevitably come under attack whenever financial markets go through periods of turbulence, resulting in a poor investment performance.
At present, people routinely blame their super fund – whether it be an industry or a retail fund – whenever their investment returns for the year are miserable. The government’s proposed changes mean that the recriminations will be aimed squarely at Canberra.
Although the Morrison government may consider this is a price worth paying to loosen the chokehold the industry super funds have over the country’s retirement savings, subsequent governments will likely rue the decision.
Another risk with setting up a government-run default super scheme – and giving the Future Fund responsibility for deciding on its asset allocation – is that it creates an irresistible temptation for future governments to try and direct how the funds should be invested.
For instance, it’s not inconceivable that a future government may decide that there’s inadequate investment in, say the local manufacturing industry, and that the best way to remedy this situation is to direct the Future Fund to change its asset allocation so that 10 per cent of the default super fund’s money is directed into Australian manufacturing.
Politicians of all persuasions have long been fascinated by the idea of directing of how the country’s retirement savings should be invested, but the present arrangements make it extremely difficult for them force super funds to invest their money in a certain way.
However, if you give politicians a governnment-run super fund, with a government-owned Future Fund deciding its asset allocation, they will find it near-imposible to resist the urge to influence its investment decisions.
A further flaw in the government’s latest scheme is that public servants – who have little clue about how financial markets work – will be entrusted with the critical job of picking which investment managers should be paid to invest the funds.
Because they’ll have little understanding of the differences in investment processes, their choice will be based on two factors alone: the investment manager’s past track record, and the fees that it is proposing to charge.
And that makes it extremely difficult to see how these new super arrangements will deliver better results than the system that’s already in place.
from Just News Viral http://bit.ly/2FA8rOT
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