If you were anywhere near any of the financial media’s outlets in the past few days you could not avoid being bombarded by the superannuation industry trumpeting the returns of last year. If you missed the sycophantic, over the top, jingoistic wank fest that was the reporting of these results here is a glimpse of what was said.
Aussie dollar’s slide helps fuel a stellar year for superannuation returns – SMH
Best super fund returns in 20 years – The Australian
A super superannuation year, if you risked it – The Age
Super returns soar in 2013 – Super Review.
Simply type Superannuation Returns into Google and you will be overwhelmed by a tsunami of foaming, breathless self congratulation. As most would know I believe superannuation is a con – not the concept of providing for ones retirement but rather the profound uselessness of the vehicles that people are forced to use. Superannuation in its current form is not providing for peoples retirement – it is giving them the illusion that it is providing for their retirement. What superannuation does is provide for the retirement of people who run superannuation funds.
Like most numbers which are trumpeted by the superannuation industry about how great and glorious they are these don’t stand up to scrutiny. The job of a fund manager is to provide alpha – that is a return above and beyond what could be achieved by simply investing in an index linked fund. I will state at the outset that superannuation funds do not provide alpha, in fact fund managers act as a drag on the funds performance.
Consider the table below – in this table I have taken the average performance for superannuation funds dating back to 2004 and compared it to the performance of the All Ordinaries Accumulation Index. The All Ords Accumulation Index is the correct benchmark for measuring the performance of the majority of investment funds and certainly all superannuation funds. I have marked those years in which the average return was superior to the markets rate of return.
As you can see there are only four times in the sample period where the average return was better than the markets. The rest of the time the professionals have managed to in some instances not even achieve half of what the market returned. This inability to perform to the level of the market has profound implications on the sort of returns that retirees can expect. The chart below looks at the value of $100,000 invested in either an average fund or an index fund.
As you can see there is a significant difference in the terminal values for each investment scheme. Even if for the next ten years the average fund return matched the market this difference would only accelerate. This raises the question of how do you enable people to provide for their own retirement in a manner that is somewhat risk averse but also practical. From my perspective there are a few answers. Firstly, the fees on superannuation funds should be strictly regulated. I know that many go off their nut when the notion of regulating anything is mentioned but remember we are an ageing population there will simply not be enough young people to provide enough taxation income to provide people with any form of benefit. Retirement savings is therefore a matter of national interest. To understand the impact of lowering fees on retirement saving listen to this podcast it talks about the UK situation but this is a universal problem. Secondly, governments should offer low cost index funds. By doing so retirees are guaranteed of getting a better return than they would with the majority (read all) funds. Finally, the system needs to be more flexible so that if people want to pay down their home loan they should be able to.