The Australian superannuation industry has been in the news again this week with researchers Dr David Ingles and Josh Fear from The Australia Institute revealing some very interesting numbers on the industry. Their findings and research make interesting reading. I have extracted some information from their findings which add to my persistent calls for people to take charge of their own financial destiny.
Ingles and Fears opening comments from their research report summarises well the conflict that occurs within the superannuation industry in this country.
“The existing superannuation system is built on a contradictory notion of the way people make financial decisions. On the one hand, the concept of compulsory superannuation suggests that Australians are myopic, irrational and have to be forced to save. On the other hand, when forced into the system, fund members are assumed to be informed and discerning investors, able to make rational decisions about how to allocate their retirement savings among a host of competing alternatives. Only one of these opposing views can be correct and it is the responsibility of policymakers to design systems that accommodate real-world human behaviour.”
The report also highlights the cost to the nation’s wealth of the running and management of these superannuation funds, with the researchers finding that:-
“Widespread lack of engagement with superannuation means that competition in this sector is structured around intermediaries (like financial advisers) rather than consumers. The aggregate administrative cost of the Australian superannuation system is 1.35 per cent of assets according to Rainmaker Information;1 Rice Warner Actuaries give a similar figure of 1.26 per cent,2 neither of which sounds substantial. However, given the $1.1 trillion size of superannuation assets, this amount in fact represents a transfer of $14.3 billion per annum from fund members to the financial services industry, equating to half the $28 billion cost of providing the age pension—a payment that accrues to over two million retirees.”
Administrative costs of 1.35 per cent have been estimated to reduce final super fund balances by up to 27 per cent or over $130,000 for a worker on the average wage. To rephrase, this cost constitutes around one-quarter of a typical worker’s total superannuation accumulation, a much larger figure than if expressed with reference to total assets.3 Whether this represents true value for money remains an open question.
High fees also impose costs on the public purse. People are expected to maintain themselves, wholly or partly, in old age and the government has provided very generous public subsidies by way of superannuation tax expenditures in order to attain this end. But substantial degrees of self-support are not likely to be achieved if, as at present, high fees reduce retirement lump sums by very significant percentages. The effect of the current system is to raise the proportion of retirees who are wholly or partly dependent on the age pension, which will inevitably result in higher government expenditure and a commensurate burden on taxpayers.
As educated investors we have the skills and ability to manage our own financial destiny. Not only is it possible to outperform the majority of the fund managers, but we are also able to save ourselves substantial amounts of money in fees and charges which is money better off in our pocket than that of a fund manager and financial adviser.
As reported in yesterdays Sydney Morning Herald written by Annette Sampson, more Australian’s than ever are moving away from traditional Managed Funds and Investment Managers in the hope of doing it better themselves.
Some 410,000 Self Managed Funds have been established by more than 770,000 people. According to the Australian Prudential Regulation Authority, self-managed funds held $332 billion in the kitty, or just under 31 per cent of the 1.1 trillion invested in super until June 2009.
Reasons vary about why so many investors choose to manage their nest egg, but control is chief among them. Self-managed fund investors typically want greater flexibility and the opportunity to take a more active role in their savings strategy.
It must be said that establishing a SMSF is not for everyone. It is also a highly debated topic about the minimum capital requirement which should be considered before setting up a SMSF. Some say as little as $50,000 but I would suggest closer to $100,000. You must consider the auditing and account keeping fees which are mandatary for all SMSF’s.
The decision to mange your SMSF is the first of many decisions you will have to make upon taking control of your financial investments. As always, I encourage those taking this path to undertake the required education and training so your journey is a success.
1. Rainmaker Information, 2009 Rainmaker Fee Review, March Quarter 2009 Edition.
2. M Rice, Superannuation Fees Report—Market Segment Analysis at 30 June 2006, prepared for the
Investment and Financial Services Association by Rice Warner Actuaries, May 2007.
3. Sydney Morning Herald – Annette Sampson – September 2009