SMSFs offer 'pension fund socialism'

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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 long evidence that, in most cases, the more you pay a financial intermediary the worse the result – their investment strategies routinely worsened the situation of many workers (especially the use of globalisation to drive down wages).

No socialism here, thank you. Ferocious capitalism was back.

But since the GFC those workers with super have increasingly become aware of how little they actually get from the fund managers who are supposed to act on their behalf. Few managers can beat the index for any sustained period of time, largely because they are the index. If a fund manager does beat the index in one year it is more likely that they will be at the back of the pack in the following year. That is why paying more for financial advisers ensures a poorer return. Most fund managers track the index, at best. So if you pay them a higher fee, that is the amount that they will fall below the index.

In Australia, many superannuants have looked for a way out, establishing and managing their own fund: a self managed super fund (SMSF). The numbers are staggering. There are over 1 million SMSF trustees, double the amount in 2004. There are over 500,000 individual funds and over $550 billion under management, about a third of all superannuation funds in Australia (and equivalent to about a third of the Australian stock market). The median SMSF trustee is in his or her 60s (which could create problems as they age). On average the funds have grown five-fold in 10 years, and the average funds in each fund are over $1.5 million.

This growth of SMSFs over the last decade has caught the funds management community completely by surprise, especially the retail funds, which have suffered the most. Industry funds have done rather better.

The financial sector has managed to strike back against this annoying tendency towards financial democracy. The Commonwealth Treasury estimates that superannuation fees are running at $20 billion annually, equivalent to 1 per cent of Australia’s GDP. According to the Treasury, this is about three times what Australian superannuants should pay.

But maybe there will be a little more of Drucker’s ‘pension fund socialism’ this time around. Certainly, the rise of SMSFs is very much connected to the attractions of controlling one’s own destiny. Many superannuants who saw their wealth diminish during the GFC have concluded, reasonably enough, that they can just as easily make mistakes themselves. At least they won’t be paying their fund managers a fortune for the privilege.

David JamesDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.

Investor image by Shutterstock.

Topic tags: David James, superannuation, SMSF, fund managers, Peter Drucker, wealth, investment



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Existing comments

Yes, David, the people have woken up and those who can are taking control of their destinies. Corporate Australia will have to adapt also. The days of cosy public companies/fund manager symbiosis look numbered. The investment of SMSFs will, I think, diversify and equities will have to compete with all sorts of asset classes to attract investment. Absolute dollar returns may not necessarily in future be the main yardstick to asses the attractiveness of investment options. Peoples' philosophy, family, friends, the environment, mood, politics will all come in to producing a much more interesting, local and relevant investment mix.

Robert Schiavuzzi | 13 August 2014  


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