A risky asset mix
One area where Mercer found the Australian system sub-optimal was in funds’ asset allocations. It gave maximum scores to countries with an allocation of between 40 and 60 per cent to growth assets, such as equities, property and private equity. A growth asset allocation higher than 60 per cent (the average allocation to growth assets in Australian super funds is more than 70 per cent) was deemed to expose the system to high volatility, particularly in countries where fund members typically bear the investment risk (as in Australia).
This issue has received plenty of attention since the global financial crisis, when the high equity exposure of Australian funds led to several years of losses.
Former Treasury secretary Ken Henry last year authored a paper attacking super trustees’ over-reliance on equities.
He says: “Equities are viewed as growth assets, as assets that provide fund members with upside exposure beyond what is offered by a fixed-income product. And it is argued that the benefit of fund members being exposed to such growth assets is increasing, as people live longer and as they become more aware of longevity risk. Frankly, I find these arguments absurd.
“The historical evidence suggests that it is generally the case that, over a sufficiently long period of time, a portfolio taof shares will outperform a portfolio of fixed income assets. But we don’t know when the crashes will occur.”
[breakoutbox][breakoutbox_title]The demographics of ageing[/breakoutbox_title][breakoutbox_excerpt]The Australian Government’s decision to limit the ability of people in the pre-retirement years to bulk up their super contributions has come in for plenty of criticism.[/breakoutbox_excerpt][breakoutbox_content]
The Australian Government’s decision to limit the ability of people in the pre-retirement years to bulk up their super contributions has come in for plenty of criticism. In the past, people reaching their 50s, when they are likely to be free of mortgage and child-raising commitments, have directed large amounts of their income into super using salary sacrifice arrangements.
Current government policy limits concessional contributions to $25,000 a year, although there are plans to allow people over 50 to contribute up to $50,000 a year if their super balance is less than $500,000.
The IPA argues for more generous concessional treatment for over-50s. Its senior policy adviser for super and financial services, Reece Agland, says: “An effective retirement income policy must be based on analysis of demographic data. Government should be encouraging those who can do so to top up their super with additional contributions.”
Baby boomers don’t have enough to retire on. Association of Superannuation Funds of Australia projections suggest that to achieve a modest lifestyle, a couple would require a super balance of about $500,000, while for a more comfortable lifestyle, they would need about $850,000. According to ABS statistics in 2007, those in the 50–54 bracket had median super balances of $120,000 for men and $80,000 for women.
The IPA says the cost to the Government is generous tax deductions in the short term. The benefit to government is that it will reduce the future cost of government pensions.
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Investment for a lifetime
Knox says he is in favour of more widespread use of life-cycle investing, although he does not believe it is an appropriate area for government policy. “There are many different life-cycle patterns and it is more appropriate for fund trustees to use their judgement
than have government mandate outcomes,” he says.
Australia’s pension system gives us much to be proud of. A new round of reforms could make it the best in the world – if we have the courage to make them.
