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Welcome to Firstlinks Edition 402

  •   8 April 2021
  • 12
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Weekend market update: US markets on Friday continued their strong week, with the S&P 500 up another 0.8% and NASDAQ 0.5%, taking US broad gains to 2.7% and a record high in the Easter-shortened week. The S&P/ASX200 put on 2.4% for the highest close since the virus outbreak. Asian markets were weaker but Europe is doing well from the strong US data. 

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There was an important moment on ABC TV's 7.30 programme last week in its 'The Future of Retirement' series hosted by Alan Kohler. As well as interviewing Superannuation Minister Jane Hume, Kohler asked former Treasurer and Prime Minister Paul Keating about the origins and purpose of super:

PK: I designed the system. I used to say to the caucus of the Labor Party, what superannuation is about is personal empowerment. That is you can cut the shape of your life, particularly at the end of your life, without reference to a government agency ... I think people in retirement think in family terms. 

AK: Let's be clear about what you intended back in 1992. Did you intend that some of the superannuation would be retained and passed on to the kids or not?

PK: Yes, basically, yes, for people to do ... that's the empowerment point, to do what they like with it. I'm not opposed to using some of the capital, but I'm opposed to the state telling you you've got to burn it all.

This is an important debate, as earlier in the programme, Jane Hume said:

"We want to make sure that people have the options available to them to spend their retirement income as efficiently, as effectively as possible so that they have a higher standard of living in retirement, which of course is the aim of the system."

In 2015, I wrote an article called 'My purpose of super is probably not yours' where I quoted evidence that using super as a bequest was a legitimate purpose, and Keating confirms again that it was always his intention. So we are republishing this article because government policy is heading in the direction of reducing the ability to pass superannuation to the next generation. 

Jon Kalkman adds a powerful article to the debate, showing how long your money will last based on differences in spending and earning rates. For example, 1% more in spending each year could reduce the time your money lasts by five years. In the context of long lives, more people will end up on a pension than expected at the time of their retirement.

Continuing our powerhouse of experts on superannuation and retirement changes (in the last two weeks, Bernard Salt, Deborah Ralston and David Knox), David Bell presented this week to the Senate Economics Committee on the proposed Your Future, Your Super legislation. David summarises his findings on the performance test which he believes will drive unwelcome changes, such as super funds hugging the average. The worry is the commencement date of 1 July 2021 is only three months away and the bill has not been drafted, never mind passed. 

This week, the ATO issued a final report on the early access to super scheme which permitted withdrawal of up to $20,000 per person. It shows that many people will drain their super if they can, with 4.8 million applications for $39 billion received. The ATO approved 4.6 million applications for 3 million people citing the following reasons: 

Demonstrating how SMSFs hold larger balances with members who do not want to withdraw early, only 40,000 of the applications worth $395 million came from SMSFs. This is only about 1% of the total amount withdrawn although SMSFs hold over 25% of super balances.

Moving on from superannuation and retirement ...

A major new trend of 2020 which is kicking on in 2021 is retail investors investing directly in the share market. It is difficult to obtain good data on the Australian market, although charts like the one below from the US show retail is now trading more than hedge funds and mutual funds (unit trusts) combined, with all dwarfed by high-frequency traders. US research suggests new retail demand is driving up stock prices, but the big question is whether it will continue if the market falls.

So it's pleasing to receive solid Australian data from Dr Shane Miller and Howie Zhang of Chi-X, including how much of our exchange activity is retail and the types of brokers dominating trades.

With residential property prices booming, as shown below, it's as much an anguish for those left behind as it might be pleasure for those who have borrowed heavily. In many asset classes, there is a listed version which facilitates easier access to the asset in smaller amounts but Hugh Dive explains why this is not the case in residential property. Hugh shows why the only real way to gain exposure is to buy a residence, but it's competitive out there ...

In casting the net wider for investment opportunities, Victor Kohn and his colleagues focus on emerging market equities, which were left behind in the tech-driven frenzy of the 2020 rise in US markets. He gives five reasons why EM is worth another look for 2021.

Finally, a lighter note with Thomas Rice, who gives his regular run through of exciting disruptions and new technologies. Anyone who thinks we are near a peak in innovation does not realise the billions flowing into new ideas on a scale that capitalism has never produced before. This week, Canva founders Melanie Perkins and Cliff Obrecht, entered the list of the 10 wealthiest Australians at $3.4 billion each after their software company reached a valuation of almost $20 billion. Yes, billion with a 'B'.

For the final time before the offer closes on 12 April, don't forget the great price offered by Morningstar to celebrate the Firstlinks 400th Edition published just before Easter. At only $1 a day for Morningstar Premium's research on thousands of companies and funds, plus the portfolio software of Sharesight, it's a good way to stay on top of your investing. Click here for details.

This week's White Paper by Shane Oliver of AMP Capital is a Q&A on the big issues of global recovery, vaccines, the end of JobKeeper, inflation, the risk of a share crash and house prices.

And for our Comment of the Week, back to Paul Keating and this from Michael:

"When watching the 7.30 programme's Future of Retirement, was it just me or was Keating jumping on something that wasn't how I remember it?

When Alan Kohler asked: "What do you think is the optimal percentage of salary to go into super? Is it 12, 15, 10, what?", Keating replied: "It is the same as the parliamentarians, 15 I'd say, 15. When Mark Latham was opposition leader, convinced John Howard as prime minister to move away from the generous defined benefits scheme of parliamentarians. There was an enquiry into what a person needed, what contribution a person should make for their future and that came out at 15 per cent and that's why the parliamentarians, the pollies are on 15, 15.4 in fact.
So, that's near, I think, the optional and particularly now as earnings, yields from shares, yields from equities and bond yields have fallen so far there is no way a fund at 9.5 per cent can give you the kind of accumulation I believe you need. So the answer is 15."
My memory of why the pollies have 15.4% is somewhat different. When they needed to come up with a contribution % for pollies, they looked to the PSSap fund that has 15.4% as the employer contribution - and that 15.4% was NOT as a result of any enquiry, it was because at the time of closing the defined benefit PSS to new members and opening the accumulation PSSap, the actuary's recommended contribution to fund liabilities in PSS was - you guessed it, 15.4%. No enquiry would come up with a ridiculous number like 15.4%.

So pollies have 15.4% because that's what the APS gets. No other reason."

Graham Hand, Managing Editor

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12 Comments
John Simkiss
April 09, 2021

The only enquirer to study the SCG is still the Henry Report and he concluded 9% was adequate. The best thing that ever happened re my financials was the ability to take all super out at age 40 on leaving company and upgrading property. My Grandsons, both Masters, are forced into compulsory super while house prices rise and they are going backwards. Super needs major re-think.

Stephen E
April 08, 2021

Most of the SMSF members have thought about their future and realise that building a large asset base over their working lives is much better than having a high income, living extravagantly and then wondering what happened when their working life comes to an end and they still have 20 to 30 years to live. I would believe that the median (asset size) members in an SMSF probably generated some wealth by highly geared and negatively geared investment properties, some more wealth by judicious long term investment in banks (CBA at float), CSL, Telstra etc because they decided to invest time to research these financial pathways. Many retired SMSF members probably borrowed 90% of a property's value at 12 to 15% interest rates and the property doubled in value in 3 to 5 years. Low interest rates and high house price rises are at odds with what is meant to happen and will soon come to an end - probably with high inflation and high interest rates.
When they had worked out their financial pathway, they then decided it was a good idea to control many of their assets in a SMSF rather than pay high management fees in retail or industry super funds. If you actually do all your own research, all your own investments, and your own accounting then all you need is an auditor with a fee of plus or minus $1000 per annum. If people are prepared to go these lengths for financial freedom and to eliminate drawing on the public purse throughout their retirement, then surely we all, as taxpayers, get a good deal from their efforts and SMSF members should be able to determine what happens to the money on their death. Obviously there are some SMSF members with very high asset bases that have perhaps taken unfair advantage of the taxpayer. This happens in lots of situations but in reality does not account for a lot of dollars in total. Perhaps these people need to be encouraged to be more philanthropic.
We should applaud all those who take care of themselves and minimise the amount they require from the government.

Michael
April 08, 2021

When watching the 7.30 programme's Future of Retirement, was it just me or was Keating jumping on something that wasn't how I remember it?

When Alan Kohler asked: "What do you think is the optimal percentage of salary to go into super? Is it 12, 15, 10, what?", Keating replied: "It is the same as the parliamentarians, 15 I'd say, 15. When Mark Latham was opposition leader, convinced John Howard as prime minister to move away from the generous defined benefits scheme of parliamentarians. There was an enquiry into what a person needed, what contribution a person should make for their future and that came out at 15 per cent and that's why the parliamentarians, the pollies are on 15, 15.4 in fact.
So, that's near, I think, the optional and particularly now as earnings, yields from shares, yields from equities and bond yields have fallen so far there is no way a fund at 9.5 per cent can give you the kind of accumulation I believe you need. So the answer is 15."

My memory of why the pollies have 15.4% is somewhat different. When they needed to come up with a contribution % for pollies, they looked to the PSSap fund that has 15.4% as the employer contribution - and that 15.4% was NOT as a result of any enquiry, it was because at the time of closing the defined benefit PSS to new members and opening the accumulation PSSap, the actuary's recommended contribution to fund liabilities in PSS was - you guessed it, 15.4%. No enquiry would come up with a ridiculous number like 15.4%.

So pollies have 15.4% because that's what the APS gets. No other reason.

Graham Hand
April 09, 2021

Thanks, Michael. Very interesting recollection, important for the debate. One thing's for sure ... the pollies will not let their 15.4% go. Mind you, who would want to work 80 hours a week in Canberra, away from your family?

Warren Bird
April 09, 2021

Keating was always adamant that 12% was where we needed to head. EG in his AGSM speech in July 1991 he was planning on getting to that level for the SGC by 2000.

Here we are, 21 years later than that date, not there yet and he's trying to claim he thinks it should be higher.

Dennis Fox
April 08, 2021

I wish Alan Kohler will concede that:
1. Superannuation in Australia started in the 1850's well before any of us were borne;
2. At the commencement of the Hawke government 42% of the Australian workforce was covered by superannuation;
3. There were many industry funds in existence at that time - stevedoring, mining esp coal, etc; and
4. The increase from 42% to 99%(?) only occurred because of Hawke & Keating so for that is what Keating can be praised for.
The majority of funds were defined benefit in the early days, SMSF's started in the 1970's.
By the way I started work in superannuation in 1966 with National Mutual and I'm an actuary well retired.

Cam
April 08, 2021

As a comment, it seems a reversal of traditional approaches that Labor wants us to pass wealth to the next generation while Liberals don't.
Looking at policies in this area, the ability to leave wealth is heavily skewed based on where you live. The increase in house prices has been much higher in bigger cities compared to smaller ones. Also, as wages a higher for exactly the same work in larger cities the regular super guarantee is also higher.
Having equal pay for equal work on a geographical level would help. Including the value of the family home (or value over say $2.5m) for age pension purposes, combined with an increase in the thresholds, would also add equity to the system. I note this 2nd idea was in the Abbott Budget, but opposed by Labor while those affected were skewed to Liberal voters. Value capture, proposed by Turnbull in a different context, could also be considered.
I have parents in their 80's living in the family home in Sydney, so would be affected by any policy focused on the family home.
As an example of the inequality, my parents and parents-in law both bought/built houses over 50 years ago for a very similar cost. The capital city house is worth maybe $2m, while the large regional centre house $350k. Its clearly inequitable that one set of 3 kids gets $670k each while the other gets under $120k as an inheritance.

Anthony Asher
April 08, 2021

$395m is 1% of 39bn! SMSF owners are obviously much less likely to need cash

Iceman
April 08, 2021

Most of SMSF members are retired anyway or very well off financially.

SMSF Trustee
April 08, 2021

Iceman, that's nonsense.

I am a case in point. My wife and I have an SMSF, but we both work full time, so not retired.

And the data shows that a lot of SMSF holders are very much in the middle classes so not 'very well off financially".

Some SMSF members are retired and some are very well off financially, but most are still working to be in a position to have a comfortable, though ordinary, life in retirement.

Pat Connelan
April 08, 2021

If people want to use super as a bequest that's fine, but I don't see why taxpayers should subsidise multi-millionaires in the process.

Trevor
April 11, 2021

To Pat Connelan : "......but I don't see why taxpayers should subsidise multi-millionaires in the process." The "wealthy individuals" subsidise MOST of the other 90% of "tax payers", who in reality are "tax recipients" for most of their "working lives" and almost certainly afterwards! Look up the ATO data . The top 20% pay almost ALL the income tax collected! Almost everyone wants to leave their family "financially better-off " than the previous generation. And in the process there are less tax dependent people to support from the public purse as each generation become wealthier ! What is NOT to like about that !??

 

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