Labor’s election euphoria to end as controversial super policy set to hit millions
Most governments encounter at least one “black swan” event – an event that comes as a complete surprise and has a major impact on the nation.
My candidate for the Albanese black swan is superannuation, which faces withdrawals in industry, retail and self-managed funds on an unprecedented scale. There are also the Donald Trump-related market dangers.
While higher compulsory contributions will cover most of the withdrawal, the industry is not well prepared.
Moreover, there is a deep split in the valuation industry, with one group claiming that non-listed property and other private assets are being significantly overvalued by current valuation methods. The regulators, the APRA and ASIC, must urgently make a ruling.
Australian statisticians have calculated that in the next four years there will be $1 trillion eligible to be withdrawn from superannuation. Many people have plans outside super for that money. Some will go on cruises. Others need much of the money to pay out their “Mum and Dad bank” obligations that helped their children or grandchildren gain a dwelling. Others mortgaged to gain better accommodation.
The original planners of the superannuation movement saw the 2025-30 period as the time when superannuation would greatly ameliorate the cost of government retirement pensions. But over the decades, foolish trustees promoted superannuation as a lump of cash available at aged 60 rather than a long-term income provider.
Many of the funds have too much of their money in illiquid, non-listed property and other assets where valuations are now controversial.
Meanwhile, for self-managed funds, the looming imposition of an unrealised gains tax on a person’s superannuation assets above $3m as at July 1 will result in large sums leaving the superannuation industry.
Increasing superannuation contributions have underpinned Australian asset values and have begun fostering new enterprises via self-managed funds.
In broad terms, the $4 trillion in superannuation comes from industry funds ($1.5 trillion), self-managed funds ($1 trillion), retail funds ($800bn) and government funds ($700bn).
In the $3bn non self-managed funds industry, the fund exodus will require skilled trustees, but too many of the funds have employer and union representatives dominating their boards. Money is being siphoned back into the union and employer group interests.
We have already seen industry funds unable to distribute money when it is required – a sure sign of inadequacy at the top.
Both regulators are alert to the dangers but have not acted. ASIC chairman Joseph Longo says: “We are talking about well-established principles of governance and responsibility, which is why when I say that some super trustees are failing Australians in a critical service, it should be a warning to all directors not to let their fundamental duties slip.”
The APRA says that, on the question of private asset valuations, “accuracy rests solely with superannuation fund trustees”. This was a disturbing abrogation of responsibility.
Meanwhile, ASIC sent out a questionnaire seeking to understand why, in Australia and around the world, stock exchanges are declining in capital market share and institutions are increasing their investment in unlisted securities.
In Australia, that is a relatively easy question to answer and relates to bad practices on the ASX and blatant discrimination against retail investors.
But the replies also showed the deep division in the valuation community over how non-listed assets should be valued in superannuation funds.
About $700bn of Australia superannuation assets are in non-listed property and other private assets. Most industry funds have between 25 and 30 per cent of their assets in non-listed securities, but some go well above 30 per cent.
Valuation is therefore a big issue, particularly given the potential exodus of funds over the next four years, which may absorb most of the new contributions.
The best definition of valuation accuracy is an arm’s length transaction between a willing seller and willing buyer. However, in private market transactions, often it is years between sales. Meanwhile, economic and industry circumstances change.
Fund valuers have developed a system, but adjusts older sales to factors including discounted cashflow and historical average equity risk premiums. The fund trustees rely on these valuation methods to determine the price of their units, which in turn governs what is paid to those withdrawing money and those subscribing.
The obvious weakness in this system is that it is totally unrelated to the sharemarket value of equivalent assets, and so the Australian real estate income trusts always trade on the ASX at a substantial discount to the valuations arrived from the existing formulas.
Fiduciaae is an Australia-based, independent valuation company formed in 2023 that, with the help of Harvard, has developed a valuation system, for unlisted assets, that provides a verifiable link between listed prices and unlisted asset prices using what is known as the LRW model developed by former Hastings Funds Management director of research Kurt Lemke, plus Mike Rafferty and Allan Wain.
The LRW model values private market assets as if they were listed on the ASX. Not surprisingly, the LTW model is showing a substantial difference to the book values of these assets in superannuation funds.
The difference was highlighted in office buildings, where actual demand for the space is being hit by work from home practices and artificial intelligence.
Fiduciaae is warning ASIC that existing methods are expensive, boost management fees, are infrequent and generate “material and well-known inaccuracies”.
“If unchecked, current private market asset valuations create a material systemic risk. The risk is not just for the superannuation system generally, but also for the millions of fund members.”
When reputable people – albeit with a self-interest – deliver that sort of warning to a government regulator, it must make a decision as to which valuation system is appropriate, given we are facing a potential $1 trillion fund exodus in Australia.
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