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Monday December 14, 2009
07:52 PM

Australian private pensions hit $1T and start to refactor

[ #40022 ]

I've written before about Australia's Superannuation private pension accounts, and how the trade unions have managed to turn their lack of conflict of interest into rather excellent $100 billion share of the $1 trillion total (this number does not include government super funds, which share a similar benefit).

While still less than 50% of the total, these funds share such a large performance advantage (between 0.5% and 1% per year better than commercial funds) that they are starting to become the new "normal" for what these funds "should" be like.

Assuming similar basic investment performance (and given the rather strict rules around what Super funds are allowed to invest in, this is likely) some quick back of the envelope math suggests that commercial management of the remaining half trillion or so is costing their members around $5 billion per year, while adding no value (something like $1,000 per person per year).

There's a good reason the industry refers to Super as the "river of gold".

I had been pondering whether or not an influx of Union Bankers might cause changes in the (still newish) Labor government. While I can't determine any kind of causative link, the government has decided to do something about this disparity between the two.

It appears that the rules around "default investment behaviour" are to be rewritten based on behavioural economics. It's been observed that the majority of Super members will just use whatever their employer recommends, and will NEVER touch their accounts to tweak them. Most famously, in the recent stock market crash it was observed that a mere 2% of Super accounts were altered to defend against the crash.

Under the new rules, the "defaulting" is likely to look a lot more like the industry funds. Less options, simpler investment profiles, and lower fee structures. Employees will need to specifically choose to leave this "Universal Option" in order to get access to more complex investment products.

Altering the rules to assume that people are lazy and forgetful is a change well worth while, and a long time coming. And with the Super pool on track to reach around $3.5 trillion, these changes should save the country (in aggregate) a hell of a lot of money.

Of course, the industry super funds still have more things to complain about. Their second big issue is the paying of "financial advisors" fairly hefty commissions based on Super account subscriptions. Industry funds generally refuse to pay commissions (after all, most of the members are send to them by the Trade Unions) and so it's no great surprise that despite their better performance few retail advisors will send customers to these funds (another conflict of interest example is almost every "consumer choice" website, and no-fee financial advisors).

But this problem is possibly a bit stickier than the behaviour economics refactoring, so I would expect this problem to be put to one side until after the "Universal Account" changes have been fully digested by the financial industry.

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