Heffron's Blog is a collection of comments related to the latest superannuation comings and goings.
Australians ill equipped to handle investment risk
November 27th, 2011
By : Martin Heffron
When the Federal Government began its push towards compulsory superannuation contributions in the late 1980s, it resulted in a shift from defined benefit superannuation funds to defined contribution superannuation funds.
In effect, this shifted the investment risk associated with funding retirement incomes from government (and larger private sector employers) to the Australian people. Whether we liked it or not most of us had to become wealth management product and services industry consumers.
However, our governments have singularly failed to implement:
- adequate regulatory policies aimed at protecting the wealth management industry consumer; and
- education policies aimed at improving the financial education of the Australian people generally.
Many Australians were – and remain – ill-equipped to handle the delegation of such significant investment risks. The proposal to increase the SG rate from 9% to 12% without addressing these issues is putting the cart before the horse.
Before 2007, this shift in risks and the lack of an adequate policy response, didn’t have much of a negative impact on the average Australian’s retirement income because investment markets provided relatively strong and reliable returns.
Put simply, most Australians retiring before 2007 were reasonably satisfied with the investment returns that had been generated by their superannuation funds.
Then the global financial crisis hit.
Whatever investment professionals might say about long term investing and the expected return volatility one can expect to see in growth orientated investments, the fact is that most Australians with defined contribution style superannuation funds are aghast, frightened and confused about what has happened to their retirement nest eggs over the past four years.
Making it worse is that the global macroeconomic outlook remains highly uncertain and the world economy is likely to get worse before it gets better. Some are looking at what has happened in Japan since 1989 (where the Nikkei has fallen over 30,000 points (see graph below), inflation currently sits at 0.2%, annual economic growth at -0.4% and Japanese Government debt represents over 200% of Japanese GDP) and asking themselves if this is what is in store for other western capitalist economies.
In any event, defined contribution superannuation is not as easy as it once seemed and many Australians do not know what to do. They didn’t realize until recently the extent to which their retirement nest eggs were at the mercy of a globalised financial system over which they have no control and about which they possess little knowledge.
This is a big deal for the Australian Government with consumer confidence more influenced by global investment markets than ever before. In some respects this represents a significant dilution of Government influence because things over which they have little or no control are having an increasing impact on our small national economy and therefore voting intentions– surely an unanticipated effect of the superannuation guarantee.
There has been a recent policy response to one of these two fundamental problems with the Government’s Future of Financial Advice and Stronger Super reforms certainly providing more power to the consumer in the wealth management industry than they have enjoyed previously.
Crucially, however, most people still lack the financial education they need in order to capitalize on that power.
It is more than time for this to be turned around.
The delegation of retirement income investment risk to the individual citizen and the impact that globalised financial markets now have on investment returns means the community needs financial advice and education like never before.
The big challenge for the Government and the wealth management industry now lies in promoting the importance of financial education and developing policies and products to meet this crucially important need.