Objective of Superannuation

The federal treasurer has set the hares racing with his musing around economics and more recently the objective of superannuation. It is topical and as such I thought I might jot down some thoughts of my own.

To my way of thinking, most practitioners would consider the objective of the superannuation system to be akin to the private health insurance system. That is, for those who are able, to take pressure off the public system that supports those that are not able to fund themselves. There are safeguards already in place such as the sole purpose test and the best financial interest duty of trustees designed to keep trustees on track.

It is conventional wisdom that the basic aim of the investments within the superannuation system to be long term in nature seeking to provide resources for retirement. Indeed, investment strategies are designed to manage risk and achieve goals set by the trustees for the benefit of the beneficiaries. The timeframe is multiple election cycles and needs confidence and stability to perform optimally.

Is the conversation about where you hold your superannuation?

When talking about superannuation as a system, we should not be differentiating between retail and wholesale funds, self managed or externally managed funds. The essence of the system is for trustees to invest long term to provide funds for members retirement.

Somewhere along the line, the concessions in taxation treatment that incentivize the public to defer their capital to later rather be consumed now, and the mandate to employers to pay superannuation guarantee into the superannuation environment on behalf of employees as a means of forced savings have caused Governments of both colours to see superannuation as a "pot" of money that they can redirect. Indeed, both sides of politics settled the matter of what they thought was a reasonable amount of capital to accumulate by setting a members benefit cap. Amounts over the cap remain in accumulation phase and are taxed at the accumulation rate of tax.

It is important in my view that the public remember that the superannuation members benefits are actually their money, not the governments, and that they ought to be able to invest their money as they see fit for their benefit. They shouldn't be punished for investing wisely and accumulating net worth either through yield or capital growth. That is the aim of long term investing.

Governments can pull policy levers to legislate what is allowed and what is not allowed, but superannuation members need stability to make long term decisions. Most financial planners will tell you risk increases if your timeframe is short. Intervention by government through this lens should always be seen for what it appears to be. That is, motivated by self interest. I suspect the government is pursuing objectives of the government for budget repair amongst other things and should therefore be met skeptically by the voting public unless or until the case for change has been mounted to the benefit of the superannuant.

Objective or Unmerited

In order to distil what is the objective of superannuation, it is useful to set out some outcomes that are categorically not the objective of superannation.

1. It was never the objective of superannuation to enable wealth transfer between generations. This does need to be understood by all.

2. It was never the objective of superannuation to enable leveraged borrowing to take risks.

3. It was never the objective of superannuation to be active in decision making in business.

4. It was never the objective of superannuation to be a means for governments of the day to fix their budgetary issues.

Splitting hairs about whether the objective in a positive sense is to provide resources for retirement or resources for a comfortable retirement, or resources for a dignified retirement runs the clear and present risk of grooming the voting public for downstream legislative change. Being subjective, the connotation of dignified, comfortable or any other adjective reeks of manipulation.

Going back to first principles, the objective in my simple mind is for the working public to do what they can to self-fund their retirement, and the government safety net remains for those who can't self-fund their retirement. I steer clear of holding views of what is comfortable, what is dignified and what is right or wrong. Most people I know do what they can within their capacity. There are so many moving parts to capacity, and to life situations. Intervention on a one size fits all basis needs to be minimalist in nature or risk unintended consequences.

I commend the Treasurer for opening the conversation. It is a conversation that clients ought to have with their advisors and a conversation families should have with each other. Is it actually desirable to have a higher superannuation guarantee meaning less money now and more capital later? Is this really what families want as they attempt to educate their kids, set them up for independence and navigate life's journey. Is it what income earners want as they seek to save for a deposit on their house? Is it actually sensible for multi generational asset owners who are likely to have too much capital at the wrong end of their life? Where does the balance lie?

I do find it strange that the public discourse around superannuation guarantee percentage often sounds like the government is the one paying rather than employers making discerning decisions around risk and reward inclusive of how many people they can employ for a given income expectation. The government is the employer in the public sector, but not in the private sector.

Cash flow leakage of all types, be that taxes, duties or superannuation that staff can't touch for decades in some cases, all impact the last employed or not employed decision. Before I am jumped on for this statement, I do actually think mandated superannuation is a good thing. I definitely think those young enough to have had superannuation guarantee their whole working career are better off for it. It is the marginal decisions around whether it needs to be increased that I think warrant conversations. Conversations that should be broader than the tax concessions provided to superannuation! Conversations that should include negative gearing on housing, the rate of GST, the design and inefficiency of the transfer system to support those who can't support themselves, the company tax rate and the list goes on.

It should also include conversations about the inability of Governments to deliver on projects on time and on budget. The petty populism and point scoring that is in our political theatre to the detriment of sensible bipartisan long term strategic decision making.

Conclusion

Now that the conversation is open, let the unintended consequences begin. The voting public antenna should be on high alert that short term politics needs to be out of the way of long-term investing as it needs confidence that the rules of the game aren't going to change between when they make the investments and when they get to enjoy the fruits of those investments. Interference from Government should be met savagely at the ballot box whenever that interference is for the benefit of the government, not the investor.