The trustee system means the public does not have to be investment experts. Gerard Noonan believes it is time for politicians and policy makers to accept these merits.
I’ve been involved in superannuation since industry funds were established for working people in the 1980s. Over those years, many high-minded national inquiries – from the Cooper review to the more recent Murray review – have implied that it’s a terrible thing to be disengaged from your super.
The argument seems to be that all super fund members in the country should be taking a lively, direct, hands-on approach to their superannuation. That is, the whole 12 million Australian workforce needed to step up to the plate, wrestle with their own risk appetites, make thoughtful judgements about what investments matched that appetite, choose which asset allocation they figure might suit them, keep an eye on the currency and the bond and the equity markets, work out how long they had to go before retirement, figure out what spare cash they might have to salt away for that happy day etc, etc, etc.
Off the back of this noble theorising has come a big push for investment choice and fund choice, accompanied by something of a free-for-all in the financial advice sector.
Clearly there are a significant number of people who make all of the investment judgements outlined above, and then some more. Good luck to them, and may they enjoy the fruits of their efforts.
Most industry funds offer multiple choice options so members who want to take a hands-on, lively approach to their accounts can do so. But we’re realists and recognise that, for many people, that’s neither a serious option, or it’s one which is open to abuse from poor (or even corrupted) advice.
Oddly, the political pundits thought the introduction of choice – and the fact that financial planners were largely part of the sales forces of the big financial institutions – would depress the startlingly successful growth of the not-for-profit industry super schemes. But it hasn’t turned out that way.
This sector accounts for around $500 billion in funds invested in various Australian and overseas assets. That’s a third of the total pool of monies put aside for retirement in Australia, and it’s managed on a trust basis.
Apart from compulsory super contributions, trust is the other important pillar of the great Australian superannuation success story.
Instead of each of us trying to out-compete each other in often confusing markets in the hope that we’ll be looking down our noses at our less-adept neighbours in 40 years’ time, fortunately some thoughtful political animals established a governance and management system where we ask trustees to look after it for us.
It’s called fiduciary capitalism. The capitalism bit is probably easy to understand. But fiduciary? It comes from the Latin word for ‘faithful’ and it revolves around the question of trust. It means, simply, that you trust another person of skill and goodwill to look after your growing retirement assets on your behalf. You rely on trustee directors to have your interests solely at heart in the investment decisions they make.
Interestingly, the Law Council of the United Kingdom has recently examined various ways of constructing financial governance in superannuation. They’ve come down heavily in favour of a trust system compared to one where people – tens of millions of them – are treated as individual agents effectively ‘contracting’ others to manage their money. The Council’s report is well worth consuming – a surprisingly readable document from such a highbrow organisation writing about something so arcane.
As it noted: “There are serious problems with the [UK] law relating to contract-based pensions. The contract model assumes that savers are fully informed autonomous parties, able to make good judgements in the market place. Yet evidence is that savers fail to engage with pensions.” It argues that the situation has been exacerbated by the so-called ‘auto-enrolment’ of people into schemes – a system like Australia’s default process. “In trust-based schemes trustees are expected to make informed decisions on behalf of their members.”
Over the years the trustee boards of not-for-profit industry and government funds in Australia have worked hard together to ensure the interests of the disengaged members are uppermost. This year, for the second year in a row, many funds produced returns in the double digits. But markets are volatile, so most expect these unusually high figures to come down. Average long term results – over several decades – are returns of around seven or eight per cent annually.
Good luck in trying to emulate that, year on year, if you want to manage it yourself. You’re perfectly entitled to do so. But luckily, you can also choose – or not choose, by doing very little – to have it managed by people who are committed to looking after your interests. They’re called trustees. In my view, they do a great job.
Gerard Noonan is a board member of the Australian Institute of Superannuation Trustees and chair of Media Super