I doubt our super will last long enough to outlive my wife, so I am changing the fields in a life expectancy calculator that has her surviving until 92. I now have her smoking two packs a day with a severe drinking problem. Unfortunately, there were no fields to have her addicted to Class A drugs or take up sky diving.
The good news for our superannuation is that my wife’s parents died in their sixties. While I am expected to live to 87 according to this calculator, my father died at 70 when he was my oldest living male relative.
Now that is one hell of an error margin when it comes to budgeting for our old age.
The superannuation industry wants me to contribute even more to my super, but the funds haven’t earned the right to more of my money. The industry has had many years to think about this longevity problem but it has produced nothing of note.
The way things are going, we will either leave a sizeable inheritance for the kiddies or be living in their spare room.
Risk capital is needed for risk products
A key reason why super funds fail to create longevity products is that every growing PFM (profit-for-member) fund has the wrong capital structure. They are ‘cooperatives’. A cooperative operates for the good of the members but has no defined equity base or shareholders. No one owns them, and as such, cooperatives cannot raise capital for new ventures or fresh capital in times of economic stress.
They are not just ill-suited for risk-based products (that is, products where capital is needed to manage balance sheet risk such as in a bank or life insurance company). They just plainly cannot develop them. The best they can do is form a joint venture with a ‘capital-based’ financial organisation. Regretfully, rule number one in life is never to share your client base with another company, especially a profit-seeking one.
Governance and disclosure standards
In addition, cooperatives frequently lead to poor governance as well as poor financial flexibility. Super fund boards of trustees may violently object to this comment, but there are areas where they fall behind minimum disclosure requirements expected from listed companies.
Listed companies are required to produce informative annual reports, which is backed up by an annual meeting of shareholders. At the annual meeting, shareholders vote on essential issues like executive and board remuneration and director representation. Superannuation funds’ annual reports resemble advertising brochures and fail to provide a solid disclosure on how the board sets remuneration for executives and directors. Since COVID, some super funds like AustralianSuper and UniSuper have had ‘inaugural’ annual member meetings. A good start, but currently, the meetings are more Q&A sessions. No resolutions are put to a member vote.
The number of times the word ‘remuneration’ is sighted in the most recent annual reports of Australia’s top 10 listed companies is on average 317 times. The number for Australia’s top 10 PFM super funds is 22. Six of the top 10 PFM super funds do not disclose remuneration for executives or directors in their annual report. While this information is legally disclosed elsewhere, it is no easy task for a member to find and interpret the data.
The industry needs to earn a rise in contributions
Before we automatically sign up to make more super contributions, here are some points:
- Super funds complain about APRA’s moves to benchmark performance and provide heat maps, but they fail to produce solid performance criteria themselves. Where we can make objective performance analysis, the super industry is at best an average investor. Click here for the previous Firstlinks article on this point.
- Members are entitled to more robust governance and disclosure, along with solving voting for directors and remuneration. There is no easy solution here. Perhaps APRA will need more authority to prescribe minimum requirements and have a remuneration veto. That being said, superannuation executives and directors are not, in my view, overpaid.
- The longevity issue needs to be solved. I would happily contribute a further 2.5% if super funds could use that money to help me manage my super fund drawdowns. The government is on record as saying they want retirees to spend their super, but we need to know more about when we are going to die.
I am not suggesting we throw the baby out with the bathwater. I am not even saying the industry is doing a poor job overall. But we need to back the Government and APRA when they challenge the superannuation industry. No one else will. The industry must do more to earn the right to our extra dollars.
After a long career in banking including 10 years at National Australia Bank as Global Head of Financial Institutions, Funds and Insurance, Donald Hellyer is now CEO of BigFuture and Open Director. BigFuture is a tech development company specialising in building financial applications. OpenDirector is a database for the details of Australia's directors and executives. This article is general information based on public data and does not consider the circumstances of any investor.