We are familiar with the extraordinary returns achieved in the past decade depicting the ‘single path’ nature of any particular return outcome, and the challenges of achieving return objectives prospectively.
Our privileged roles as fiduciaries and the nature of our profession offers us access to information and knowledge incomparable to many others. However, we should not underestimate the vast level of information asymmetry between ourselves and the general population.
It is therefore incumbent on the leadership of the superannuation and investment industry to educate the public and to support increased levels of financial literacy. This responsibility transcends irrespective of whether one represents an industry, government, corporate or retail fund.
At the current juncture, those in leadership positions have a choice to collectively provide a narrative supportive of genuinely informed decision-making or to pursue an alternative course to individually benefit. Without genuine and empathetic leadership, which reflects clear and thoughtful consideration of how people make financial decisions, I fear for the decisions that will be made by individuals amongst the rhetoric and noise.
A driver of this is the way the past decade of returns is being implicitly extrapolated through consumer focussed investment return comparisons, resulting in significant challenges when comparing the outcomes of portfolios that have adopted different investment strategies. This is further compounded when comparisons are made between funds of different risk levels, with potentially dangerous conclusions being drawn.
I accept it is now a fact of life that industry investment return comparisons will occur regularly and often without context. I also accept the reality that we are now a Superannuation industry where being in the bottom 25 per cent over 5 years is a measure of systemic underperformance, despite the stated objectives being achieved. However, it is evident, and often frustrating, that the comparisons made do not compare apples with apples, and the time horizons we are theoretically managing to, is in decades.
I recently read a Statement of Advice for a family member which effectively recommended the retiree clients move out of cash and into equities primarily because, according to the adviser, ‘the cash return was too low’. This prioritisation of return-seeking behaviour, by migrating portfolios up the risk curve, is a symptom of late cycle behaviour repeated in previous cycles. In the lead up to the Global Financial Crisis (GFC), it was evident that significant risks were taken with other people’s money, resulting from similar behavioural influences at institutional and individual levels. This made many people – who couldn’t afford to be – a lot poorer.
The current systemic risk is that members are pushed into portfolios with higher risk than is suitable, for reasons that are more driven by business and career factors, than what is optimally in the member’s best interest.There are eerie familiarities with the pressures and trends coming out of the implementation for the choice regime. We don’t need to stretch our memories back that far to recall what happened to the returns of ‘top performing’ funds in the years preceding GFC, to the couple of years after. The same goes for gearing equity portfolios of pre-retirees.
Either superannuation trustees should be empowered to adopt both default and choice investment approaches that are aligned with the member profiles of their fund, or the decision is taken that there is a sole, nationalised default provider with a regulated asset allocation. Given the direction the industry is heading, I struggle to reconcile the logic of any future default system that would tolerate any dispersion of returns between providers. If we are to expect minimal variation in the returns of default options, e.g. where 6.5% vs 7% is an unacceptable underperformance, we should consider aggregating all default members in one place to achieve maximum scale benefits.
The people I know in the industry take their roles as fiduciaries very seriously. I have not met a Superannuation Executive or Trustee who doesn’t think about member outcomes in their decision making. However, I fear that members may be worse off in the future due to actions taken arising from the pressure being placed on the industry.
Personally, I believe in the benefits of scale, subject to members continuing to receive strong levels of service, and I am very supportive of WA Super pursuing future merger opportunities. It is my view that there is a strong rationale from an investments perspective to have fewer, larger funds as the core providers in the industry.
However, if the current approach of simplistic, one dimensional comparison is allowed to dominate the public conversation, with the outcome being an increase in populist regulation, it will require strong leadership from those leading the future industry. This is to ensure a strong commitment towards suitable and tailored member outcomes is preserved and communication is focused on improving financial literacy and providing information to genuinely support informed consumer decision making. A task to be taken seriously.