‘Irrelevant’ super hinders prosperity of Baby Boomer kids

Paul Keating created a pool of superannuation money that gave both the industry funds and the old savings giants a wonderful opportunity, Robert Gottliebsen writes.

Buried in the convulsions of budget week are very early warnings for industry superannuation funds that could lead them to make similar mistakes to AMP/National Mutual and MLC.

The industry funds have replaced AMP, MLC National Mutual and other life offices as the unchallenged leaders in Australia’s savings and capital formation arena.

Thirty years ago it seemed inconceivable that life offices would be replaced.

But industry super funds have been the most successful capital and savings vehicles in a generation.

Paul Keating created a pool of superannuation money that gave both the industry funds and the old savings giants a wonderful opportunity.

The industry funds took full advantage while the legacy funds dropped the ball because they did not pick the changes in the market and pursued outdated policies.

When the superannuation guarantee levy began to boost super coffers, it was perfectly timed for the baby boomers’ generation, where a huge rump were in their 30s and early 40s and had purchased a dwelling.

This gave them a feeling of future security and they embraced super as a way of gaining additional resources for their retirement.

The life offices demutualised, retained their high-cost marketing and concentrated more on fighting self-managed super funds than lifting their investment performance and embracing the new era. Banking ownership compounded the underlying problems.

The industry funds outperformed them and creamed the market.

Now the baby boomers are starting to retire or approaching retirement age, which poses a whole set of new challenges for industry funds.

Those challenges are compounded by the next generation – the children of boomers – who are in a very different situation to their parents.

Many have purchased a house and are saddled with a very large mortgage. Others have simply been priced out of the housing market and are watching rents skyrocket.

For a large part of this generation super seems not only an irrelevancy but hinders both their current prosperity and their future retirement because it contributes to their inability to own what their parents have shown to be the best retirement asset – a dwelling.

Clearly that is not a universal view, but you can see the seeds of discontent germinating.

At the same time the baby boomer retirees face the complex retirement world and need advice.

Good advice is costly and industry funds were slow to move in this area.

As they begin to embrace it they face the challenge of whether to provide the advice free and raise their costs and annoy the financial planning industry, or recoup their costs with charges that will annoy some baby boomers.

An alternative is to provide a low-cost basic service, but that can be high-risk given the complexities of government rules, particularly when pensions are involved.

One of the reasons why industry funds have outperformed their rivals is that they wisely invested in non-listed direct commercial property and infrastructure investments, which have performed very well.

If interest rates continue to rise and stay at high levels then many of those current unlisted property values will not be sustainable.

The looming danger of commercial property value reduction is reflected in the depressed value of listed property securities. Industry super fund members are not prepared for this possibility and if it eventuates there will be great member unhappiness.

But there are other challenges.

The industry funds have agreed to pour money into subsidised social housing: a need caused in part because state and local governments’ charges and incompetence have added 40-50 per cent to the cost of dwellings.

According to Treasurer Jim Chalmers, in the new social housing accord super funds will work with the government to leverage more investment that “delivers for their investors’ and members’ interests, and for the national interest”.

There will be “an ongoing funding stream to help cover the gap between market rents and subsidised rents – making more projects commercially viable”.

They may turn out to be good investments but it is always dangerous to rely on government subsidies to gain an adequate return, particularly when the federal government faces escalating debt.

Industry super funds are there to benefit their members. It’s wonderful if those returns can be combined with social benefit, but all too often these sort of deals don’t provide great returns.

Meanwhile the opposition now wants first-home buyers to be able to access their super savings to buy a dwelling.

This is a strategy that would not have been appropriate for the baby boomer generation but for their children super is becoming less and less relevant. It makes a lot of sense.

Under the Coalition scheme when you sell your house the money goes back into the super fund. There is a real risk for the industry funds that this will become a political issue and an industry fund stance that backs the government will really annoy younger members.

Just as the life offices did not adapt to what was happening, so there is risk that the comfortable industry funds’ boards will drop the ball.