Welcome to Finance and Fury, The Furious Friday Edition

Today, the episode is delving a little deeper into superannuation

I Work as a financial adviser – see a lot of changes to the legislation of superannuation since I joined the industry in 2011 – Today – Episode on my theory of superannuation from a viewpoint you might not see anywhere else

History of Super –

  1. From 1970s – superannuation arrangements were in place were set up under industrial awards negotiated by the union movement – nothing like currently – they were union/company run
  2. 1983 – A change to superannuation arrangements came – through an agreement between the government and the trade unions
    1. Called “Prices and Incomes Accord” – the trade unions agreed that their members (workers) forgo a 3% pay increase to instead direct into the new superannuation system – important point of forgoing salary increase – come back to later
    2. This 3% was also matched by employers’ contributions the employees’ income –
    3. Though there is general widespread support for compulsory superannuation today, at the time of its introduction it was met with strong resistance by small business groups who were fearful of the burden associated with its implementation and its ongoing costs – still – passed anyway due to union support
    4. Created 6% in total for union/Government workers – but didn’t exist across the board yet
  3. 1992 – the Keating Labor Government – compulsory employer contribution scheme became a part of a wider reform package – “Superannuation Guarantee” (SG) contributions
    1. Why? Reasoning of Australia, along with many other Western nations, would experience a major demographic shiftin the coming decades, of the aging of the population, and it was claimed that this would result in increased age pension payments that would place an unaffordable strain on the Australian economy.
    2. The proposed solution was a “three pillars” approach to retirement income:
      1. compulsory employer contributions to superannuation funds,
      2. further contributions to superannuation funds and other investments, and
      3. if insufficient, a safety net consisting of a means-tested government-funded age pension.
    3. The Keating Labor Government had also intended for there to be a compulsory employee contribution beginning in 1997-98, with employee contributions beginning at 1%, then rising to 2% in 1998-99 and reaching 3% in 1999-2000. However, this planned compulsory 3% employee contribution was cancelled by the Howard Liberal Government when it took office in 1996. 
  1. By 2002-03 – Howard Government – The employer SG contribution was allowed to continue to rise to 9
    1. Limited employer SG contributions from 1 July 2002 to an employee’s ordinary time earnings
    2. Before this – no cap in conts
  2. The SG rate was 9% from 2002-03 to 2013-14, when the Rudd-Gillard Labor Government passed legislation to increase SG contributions to 12% by 1 July 2019 – originally intended by the Keating Government in 1995 – but got strong opposition and replaced by Howard
    1. Abbott Liberal Government deferred the start of this planned increase to the SG by six years, from 1 July 2015 to 1 July 2021. The SG rate has since 1 July 2014 been- from 9.5% and in July 2021 the rate is planned to increase by 0.5% each year until it reaches 12% by 2025.

Super Today

– has grown massively – increase in compulsory contributions, being tax-effective, and strong market growth

  1. It is massive – Estimates show it is likely cracked the $3trn mark as of last month – ASX is about $2trn – remember that every super fund has money in ASX products – so even assuming a 25% = $750bn of the market cap = 37.5% of ASX
    1. Massive inflows as well – $120bn p.a. of employee/member contributions
    2. The Australian industry superannuation funds is under fire for re-investing funds into questionable investments, to benefit related parties ahead of the investor. Thus, a conflict of interest exists with the parent entity re-investing funds into funds related to the parent entity. Thus the best rate of return is never sought out, and the bank or entity investing the money is not seeking the highest rate of return.
    3. Money in certain investments now is a concern –
      1. Debt – Bonds – Corporate and derivative position – repo markets
      2. Property – Build to rent schemes – especially for Gov buildings to occupy using tax payer funds
      3. Index – buying into markets and pushing prices up – for no fundamental gains
    4. Most non-self managed funds only provide very minimal information to the account holders about how their money has been invested. Usually, only vague categories are provided, such as “Australian Shares”, with no indication of which shares were purchased. This makes the fund’s management largely unaccountable to their members.
    5. Examples of legislation or policy changes that work against you – political/fiscal or monetary policy bank accounts
      1. Fiscal is taxes – where super in accumulation and now pension if you work and below 65 = taxed
      2. Also – money available to buy government debt to fund their expenditure
      3. Monetary is QE and having
  1. Where is also gets more corrupt – Who started super? Labour – but Liberals have helped it too – so it is a joint political effort
    1. But super is not all made equally – think super industry all gets along? Current political battlefield in my opinion
      1. Industry funds – Their investment options managed by them, control of flow, or at least who the money is given to for investment management
      2. WRAP platforms and SMSFs – ones outside of political control/backing
        1. You decide where the money goes – not the default option almost everyone is in with Industry super
        2. MySuper -default offering based around your age – used to be balanced across the board – but FOFA and stronger super reforms changed all of this
    2. These came from a campaign created by a Genuine politician – Bill Shorten – Shorten was elected to the House of Representatives in 2007 – was immediately appointed a parliamentary secretary – had almost a few years’ experience in the union
      1. Shorten was elected as the AWU’s national secretary in 2001 and was re-elected in 2005. He resigned as Victorian state secretary of the AWU in August 2007. He was also director of the Superannuation Trust of Australia (now Australian Super) and the Victorian Funds Management Corporation.
      2. Any guess who some of his largest political donors were for his elections? AWU made $25k, but AusSuper made $25,500 to AWU just before – all of this happened in 2006-2007 just before his first run into politics
      3. Shorten – Assumed office in 2007 – became minister for financial services and superannuation, assistant treasurer and Minister for Workplace Relations in the Gillard Government in 2010 –
        1. Took him 3 years – must have been impressive – after graduating from Arts/Law degree – worked as a lawyer for 20 months then left to become a trainee union organiser. Worked his way up in the unions until becoming Vic state security in 1998 – where he remained until taking office in 2007
      4. Corruption internally as to where super funds are invested –
        1. Publicly – buying Gov bonds – might get a gov job later/funded for office – or vies versa
        2. Privately – Example of how this would play out – Say you are a board member, and some business/share or property area you have a financial interest in would benefit from an investment/boost to demand = direct the funds there –
          1. Aus Super is very transparent when it compares to other Aus industry funds – go to the end page
          2. One area they don’t disclose so well is private equity – they tell you the private companies but not the amounts
    3. Regulation changes under FOFA –
      1. Insurances of fofa – super v non-super IP
      2. Financial advice regulations –
      3. Allowed for banks, industry funds and product providers to continue to make money of their products for recommendation, but banned any other adviser have the same opportunity through nil-entry products
        1. Im all for this – Advisers shouldn’t get it – charge for a service provided – as opposed to poaching wealthy clients with $1m+ to make 3.3% on placing their money – but nor do I think industry funds charge management costs through investments if it is being outsourced, who charge their own costs (as an ICR)
        2. Also – nepotism in construction projects – safe secure investments into Government buildings which the tax payer pays for – Bris is a good example – Cbus invested –
        3. Super funds used to pass the borrowing/construction financing costs to the investors – without disclosing it – now it is at least disclosing, but not included in the costs of the investment directly –
  1. More recent 2019 election campaign – Shortens proposed legislation changes
    1. Franking credits – split in who gains the benefits – in pension phase, SMSF or WRAP gains 100% of benefits – but in unitised structures, tax offsets go to the overall fund – so the returns while not taxed, will be lower on FF income
    2. Trust taxes – potential to destroy SMSF structures – as they are non-unit in structure
    3. Just saw that every bit of regulation went to help the industry funds, while hurting accounts where you can control your funds.
  2. The Government will likely continue to intervene with the super industry – lots to gain and may ways to do it
    1. Tax side – easy on the fiscal budget – already done a bit – the introduction of tax in super – increase in taxes on contributions for those earning more than $250k (30% instead of 15%)
    2. Consumer protection – Losses to the superannuation funds from the global financial crisis have also been a cause for concern, said to be around $75 billion.
    3. Initial financial discussions determined that the Australian economy would be at risk if citizens were allowed to immediately access and withdraw Superannuation, further confirming the belief that mandatory Superannuation may not be a viable long-term fiscal management tool. This was compounded by a lack of proper industry regulation, allegations of fraud and financial misconduct and a host of other issues currently plaguing the industry as a whole – “Thousands of superannuation fund members defrauded in Trio Capital scandal”
    4. A sudden outflow – say people could access and just withdrew – markets could collapse – as billions if not trillions may flow out
      1. And create other bubbles – like in property – reallocation of resources

Summary

  1. Lots of money flowing in – likely yours –
  2. Pays to know where it is – and be aware of what powers that be have in plan for your super money

The inflow of SG – https://www.superannuation.asn.au/resources/superannuation-statistics

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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