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SMSFs offer 'pension fund socialism'

  • 13 August 2014

In 1976, the unusual and often prescient, management thinker Peter Drucker penned a book entitled The Unseen Revolution: How Pension Fund Socialism Came to America. He was making the point that, at least in terms of the strict legal definition, the actual owners of the stock market were workers – via their pension funds. Drucker was somewhat cheekily implying that the home of capitalism, America, was becoming Marxist: the workers’ owning the means of production. At the very least it showed that there were many different types of capitalism.

A similar broadening of ownership has developed in Australia since the creation of compulsory superannuation. A study in BRW magazine that compared individual wealth of Australia’s richest people with the wealth held by superannuation funds (undertaken by this writer) revealed the trend. In the early 1990s, several wealthy individuals made it into the list of the top 20 sources of wealth. A decade later, only mining magnate Gina Rinehart made the list, and then only just at number 20. The biggest pools of money, and financial power, in Australia are in the superannuation funds and insurance companies, not with individuals.

The subtle effects of such diffusion of wealth and investment intentions are hard to trace but it is reasonable to conclude that they have a profoundly equalising effect. A country in which wealth is in the hands of powerful families – as is routinely the case in many Latin American countries, for example – will almost inevitably have a more concentrated power structure than a country in which the sources of wealth are more distributed.

But if Drucker thought that the growth of pension funds would lead to greater emancipation of the workers, he was to be very wrong. The 'ownership' by the workers was only indirect. The decisions about how the money was to be invested were made by intermediaries: fund managers. They rewarded themselves handsomely for that privilege – the old trick of getting a percentage of funds under management rather than a flat fee – and became something of a rule unto themselves, a new power elite.

The global financial crisis demonstrated just how reckless the financial managers could be with other people’s money, and, worse, how they could act against the interests of the very workers whose interests they were supposed to be representing. Not only did they fail to get returns to justify their massive remuneration – there is decades