What's not so super about super
For the last 25 years, the SFS Team have been describing to our clients why Superannuation is so valuable as a savings vehicle to build wealth from which to create a solid platform for a comfortable retirement. Putting aside the tax advantages, there is also the discipline of regular saving and investing. Because contributions are automated, you invest in good times and bad, irrespective of how you are feeling about investing or what other opportunities might be tempting you. That discipline, together with the power of compounding, provides the opportunity for excellent long- term returns.
The Covid-19 pandemic that we are currently living through has exposed a number of fragilities in our economy in general and the superannuation system in particular. To put it bluntly, when the economy is strong and all markets - shares, property and bonds - are performing well. Everyone looks like a hero. When the economy turns sour and the markets turn with it, many are left exposed. To quote Warren Buffett “you only find out who is swimming naked when the tide goes out.”
Our superannuation system is modeled on the basis there will always be more contributions than withdrawals. In 1993, when mandated Super Guarantee contributions were introduced, the baby boomers were still in the workforce making contributions to their superannuation funds. With all the incentives of saving through superannuation, assets in superannuation funds have grown spectacularly. The investment return has been solid with returns of 8.7% pa over the 10 years to June 2019 (latest figures available) when inflation averaged just 2.2% over the same period.
This creates two problems in the current situation, as we are facing the prospect our first recession in nearly 30 years.
With unemployment rising, there will be a reduction in superannuation guarantee contributions. There might also be a fall in salary sacrifice contributions as well if savings are directed elsewhere like repaying debt. In addition, our population is now getting older meaning there are more people than ever drawing on their superannuation assets to fund their retirement in the form of pensions. This is further exacerbated by the government relaxing hardships provisions to allow people access to their superannuation before they have retired. That measure alone could result in up to $60 billion being withdrawn from superannuation mostly by younger people.
We can liken this to the squeeze people feel when trying to balance their home budgets. When costs are going up and income growth is not matching those cost increases, it is not a pleasant place to be. This is the case for many industry super funds right now. On behalf of their members, trustees of these funds have invested heavily in property and infrastructure assets. These are known as “illiquid” assets which can be hard to sell in difficult markets if cash is needed. With requests for withdrawals at possibly record levels at this time, this might force the funds to either sell illiquid assets at lower prices or further reduce their investments in fixed income and shares. Not a good place to be.
Now to the second problem. Over the past few years, these same super funds have been encouraged to amalgamate for reasons of efficiency. A number of the funds are now so big that should they be forced to sell down their shares, they could actually depress the share market and be a source of volatility in themselves. Again, not a good place to be.
For those of you who are advised by the SFS Team, you know we have been very wary of investing in illiquid assets and that together we have the control over our investment decisions, not leaving it to others.