We look at the latest proposals to allow first time buyers to access superannuation to buy their first home. The proposal is supported by powerful Political voices, but also opposed by Ministers. And evidence from our surveys suggests this would be a trigger to rise prices further.
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Join us for a live Q&A as I discuss the latest on the financial markets with Damien Klassen, Head Of Investments at Nucleus Wealth. https://nucleuswealth.com/author/damien-klassen/
I discuss a Nucleus Wealth article authored by Tim Fuller, Head of Advice at Nucleus.
The allure of having complete control over your financial future is very compelling, and becomes even more so in turbulent market periods, like the one we have seen in 2020. So it is understandable that 2020’s volatile markets combined with the opaqueness of many large super funds could have left you wondering if you should be opening your own self managed super fund (SMSF).
I caught up with Damien Klassen Head of Investments, at Nucleus Wealth to discuss their investment strategy in the current uncertain climate – ahead of some important announcements coming later in the week.
An important discussion with Steve Mickenbecker, Group Executive, Financial Services & Chief Commentator at Canstar. Super is fraught with issues, which can squash returns. What can be done to maximise them?
Note: DFA has no commercial relationship with Canstar.
[We had some issues with audio sync over Zoom, fixed in post as best we could]
Damien Klassen, Head of Investments at Nucleus Wealthhighlights some important issues….
He runs a superannuation fund that only buys liquid assets in separately managed accounts. So, an investor’s return is their return. They can’t rely on tax mingling, unlisted asset revaluations or other accounting tricks that master trusts use. So some may say its sour grapes. But he highlights some surprising facts. Anyone remaining in certain funds bears the brunt of the losses as others chose to leave.
Most superannuation funds, and especially
industry funds have significant balances in unlisted assets. Many are
telling you that these assets haven’t lost money, or are only down a
little despite sharemarkets being down close to 30%. This gives rise to
perverse incentives for superannuants:
If you leave one of these funds now, you will get paid at the high prices for unlisted assets
Anyone left behind bears the brunt of the losses
Rough numbers? I suspect right now that the median superannuation fund will pay you about 7% to leave.
Background
Chant West gave us a quick preview of superannuation fund returns for March:
“Growth funds, which is where most
Australians have their superannuation invested, hold diversified
portfolios that are spread across a wide range of growth and defensive
asset sectors. This diversification works to cushion the blow during
periods of share market weakness. So while Australian and international
shares are down at least 27% since the end of January, the median growth
fund’s loss has been limited to about 13%.”
Calculation
Some quick maths.
Chant West’s definition of a growth fund is one that has 60-80% of its assets in growth equities.
Let’s call it 70% exposure to shares, 5% cash and 25% to a composite bond fund.
If shares are down “at least” 27%, cash is
unchanged, and a composite bond fund is down about 5%, then the implied
return is a loss of -20%.
Chant West says the loss is only 13%.
There is 7% missing.
And that assumes that the 25% is in composite bonds, more likely it is higher risk unlisted assets.
So where is the missing money?
Now, individual funds will have different
performance obviously. Our own growth fund is down less than 1% over the
same time frame, but we took dramatic and aggressive measures at the
end of January that I know others did not.
The superannuation market is $3 trillion.
It is the market. If, somehow, almost every superannuation fund worked
out the same thing we did and sold equities at the end of January, the
market would have fallen in January. They didn’t.
The answer is superannuation funds have
unlisted assets that they are not writing down. They are pretending that
the prices are mostly unchanged from January.
What about the recently announced writedowns?
A few industry funds have written down
assets. For example, AustralianSuper has revalued its unlisted
infrastructure and property holdings downwards by 7.5%.
Um, have they looked at the rest of the
market? The listed property sector is off more than 40%. Airports? Down
30%+. Private Equity? Ha! You are telling me that illiquid shares are
worth a few per cent less while listed shares are down 25%+ and illiquid
bonds aren’t even trading?
The writedowns help, but are nowhere near the level the assets would sell for today.
Financial Crisis Comparison
A great example is unlisted property funds
during the financial crisis. Unlisted property funds invest in
effectively the same assets as listed property funds, the underlying
properties are worth the same, the performance differs because of how it
is reported:
The perverse superannuation incentive
The problem is that if you own a fund that
reports like this, you can be diluted if other investors leave. And any
contributions you make now are at inflated prices. To illustrate with
an extreme example, let’s say:
You and I are the only investors in a super fund with $100 each invested
The fund owns 50% an unlisted asset and
50% cash. So, the total value of the fund is $200 made up of $100 in the
asset and $100 in cash.
The asset falls 60% ($60) in price, so
our fund is now only worth $140 ($70 each, we both should take a 30%
loss), but the fund doesn’t revalue the asset and so reports the fund
still being worth $200.
I decide to redeem my holding in the fund.
The unlisted asset can’t be easily sold,
and so the fund pays me $100 cash being half of the $200 that the fund
is still being officially valued at. I’ve broken even!
This leaves you with $40 of unlisted assets – a 60% loss which is double the loss that you should have taken.
Adding insult to injury
The other problem with a typical
superannuation fund (but not some of the newer ones that use a
separately managed account structure) is your tax is mixed with other
investors. Rodney Lay from IIR recently highlighted the issue:
…unit trust investors face another risk –
being subject to the taxation implications of the trading activities of
other investors. Net redemption requests may require the manager to sell
underlying portfolio holdings which, in turn, may crystallise a capital
gain… …During the GFC some investors had both (substantial) negative
returns plus a tax bill on the fund’s crystallised gains. Good times!!!
Net effect
So, if you are a loyal soldier sticking
with a superannuation fund that continues valuing unlisted assets at
last year’s prices then:
You are going to absorb the losses of anyone that leaves
You might even get an additional tax bill because the people that leave trigger a CGT event for you
But at least your superannuation fund will be able to “report” higher returns.
No free lunch: higher super means lower wages uses
administrative data on 80,000 federal workplace agreements made between
1991 and 2018 to show that about 80 per cent of the cost of increases
in super is passed to workers through lower wage rises within the life
of an enterprise agreement, typically 2-to-3 years. And the longer-term
impact is likely to be even higher.
‘This trade-off between more
superannuation in retirement but lower living standards while working
isn’t worth it for most Australians,’ says the lead author, Grattan’s
Household Finances Program Director, Brendan Coates.
‘This new empirical analysis reinforces
that the planned increase in compulsory super, from 9.5 per cent now to
12 per cent July 2025, should be abandoned. Most Australians are already
saving enough for their retirement.’
The paper directly measures the
super-wages trade-off for nearly a third of Australian workers – those
on federal enterprise agreements. But it shows that other workers are
also likely to bear the cost of higher compulsory super in the form of
lower wages growth.
Despite the claims of some in the
superannuation industry, it is unlikely that future super increases will
be different from past increases.
It’s true that wages growth has slowed in
recent years, but nominal wages are still growing by more than 2 per
cent a year, so employers have plenty of scope to slow the pace of wages
growth if compulsory super contributions are increased.
And none of the plausible explanations for
lower wages growth – whether slower growth in productivity,
technological change, globalisation, an under-performing economy, or
weaker bargaining power among workers – helps explain why employers
would foot any more of the bill for higher compulsory super this time
around.
If employers aren’t willing to offer large
pay rises today, it’s hard to imagine why they would pay for higher
super. In fact, if workers’ bargaining power has fallen, employers are
even less likely to pay for higher compulsory super than in the past.
Grattan’s 2018 report, Money in retirement: more than enough, found that the conventional wisdom that Australians don’t save enough for retirement is wrong.
Now this working paper finds that the conventional wisdom that higher super means lower wages is right.
‘Together, these findings demand a rethink of Australia’s retirement incomes system,’ Mr Coates says.
Quirks in the superannuation system in Australia means that some who save more will get less. This highlights again the limitations of the current arrangements.