Australia is a nation of “accidental investors”. Is it time to take a closer look at the pension system? | Satyajit Das
MMargaret Thatcher tried to turn Britain from a nation of shopkeepers into a nation of shareholders. Mandatory retirement savings and low interest rates – until recently – on traditional bank deposits have turned most Australians into casual investors.
From the 1980s, pension rules changed from defined benefit plans (an inflation-indexed pension based on your last salary, paid by employers or the state in return for regular contributions) to defined contribution plans (when you retire, you receive both your and your employer’s payments). plus investment returns).
Today there are Australian pension systems 86% defined contributioncompared to 5% (countries with indexed pensions like Japan or the Netherlands) to 64% (US) globally.
The move away from defined benefits reflected the costs and often unquantifiable risks, such as B. the longevity, reflected for the provider.
For example Australia future fund was established to meet the unfunded obligations of public sector indexed pensions. Marketed as increasing choices that allow portability, and backed by generous transition rules and tax incentives, responsibility and investment risk have been secretly shifted to employees.
With approximately 48% of bond funds invested in stocks (among the highest in the world) it requires a significant level of individual financial literacy.
Few mutual funds will post positive returns this year due to falls in stock markets and other financial assets. Most bond funds will lose around 3-10% depending on the investment, albeit after recent sharp gains.
Where funds show modest positive returns, profits are often made unlisted private assets (which now account for up to 10-15% of investments). As the prices are not easily observed, the ratings used are opaque, subjective and rare.
For example, Klarna, a Swedish buy-now pay later company held directly or indirectly by some funds, suffered an 85% decline in value in a year based on its most recent fundraising, compared to a general decline in the stake of 15 to 20% markets. The case is not isolated.
Excuses for poor results are based on ominous imagery – a “one in 10,000 year event,” a “black swan event,” or a “perfect storm.” Adjectives such as “unprecedented” are revised. Bromides offered may include “asset allocation inefficiencies”, “index weighting”, “correlation breakdowns”, “sector rotation” (translated: “we bought things that lost value”).
Incomprehensible, if read, the letters will not explain why highly paid professionals were caught off guard. The self-serving message is always “buy more of what we sell”, “please do not withdraw your money” or “if you must, please replace it with another of our offerings”.
High fees (in thousands of dollars) mean that few investors access appropriate advice. The cost reflects the ban on advisors receiving commissions on recommended products to avoid conflicts of interest and increased regulation.
Advisors understandably also favor wealthier individuals with large portfolios. This has spurred DIY (do-it-yourself) investment and trust, particularly among younger cohorts, in influencers of uncertain origin.
In any case, information asymmetry – the inability to distinguish between good and bad advice – makes informed decisions difficult.
Financial advice is also a service, the true results of which are only seen when it is too late. And the arrangements are expensive. Australians pay fees and costs for pension insurance alone around $30 billion annually. The problems are unethical behavior, misrepresentation and fraud well documented.
As well-intentioned as it may be, the current system combines citizens’ savings and financial security with prices for often risky investments that they may not fully understand. While it doesn’t guarantee Australians a secure future, it creates an inordinately large financial sector and brings lucrative rewards to a select few in the financial services sector.
It also fuels inequality.
Defined contribution schemes put women at a disadvantage as time without work reduces accrued benefits. Retirement benefits total approximately $38 billion annually, disproportionately benefiting high-income groups.
Underlying weaknesses have been masked by strong investment returns over the past few decades, which could now be changing. As the workforce falls and Australians begin to draw on those savings, many of the shortcomings will surface.
The most sultry attempts at reform — disclosure, naming and denouncing underperforming funds, more regulation — don’t address the real issues.
In a world where few read newspapers and most get their information from Twitter or cryptic newsfeeds, improving financial literacy may seem unrealistic.
In some countries, mainly in Europe, workers need the simpler option of an enhanced state pension system, supplemented by a voluntary contributory component or private arrangements.
Investment risk needs to be redistributed away from households and back to employers, governments or financial institutions that are better equipped to bear and manage it. But regardless of the structure, the issue of affordability remains.
This requires realism in terms of minimum retirement ages, benefits, means-testing of entitlements, appropriate contribution levels and appropriate taxation to ensure financial sustainability and fairness.
Unfortunately, bipartisan complacency over Australia’s ‘gold standard’ pension system and opposition from current beneficiaries are preventing the necessary changes.