Superannuation Magic -
Now You See It, Then You Won't.
This article appeared in The Sydney Business Review on 15 April, 1995
Compound interest is a wonderful thing. If you divide 78 by the interest rate per period, you get approximately the number of periods it takes to double your money. So, if you put $1000 on deposit at 10% per year, you will have $2000 in about 8 years, and it will double every eight years. In 40 years you would have over $45,000 for an outlay of $1000.
Superannuation is also supposed to be a wonderful thing. If instead of just one deposit of $1000, you put $1000 per year into Australia's worst-performing super fund, after 40 years you would have less than $5000 for an outlay of $40,000. Through a quirk of mathematics called an "attractor", the total amount returned from the fund could never reach $5000, even if contributions continued for a million years.
Of course, fund managers will say that I do not know what I am talking about. The losses experienced by all funds are caused by the volatile bond market, they will say. Or by currency fluctuations. Or by the volatility of the stock, commodity and property markets. They will say that they cannot guarantee performance or see into the future. They will also point to the tax advantages of superannuation.
Well, I happen to believe that they are paid to see the future. I also believe that if they cannot guarantee to provide a return in excess of the pitiful cash rates offered by banks then they have no right to be in business. If their investment performance falls below cash returns then the management and investment staff should have to make up the losses out of their own pockets. As for the tax advantages, tax only changes the amounts, not the direction.
We have heard a lot recently about "derivatives". Futures markets were not introduced as an alternative to casinos, but to allow people to manage the volatility of markets by providing some degree of certainty about future transactions. On the matter of conventional forms of gambling, both poker machines and the NSW TAB provide an average return for punters which is better than the worst super fund. Roulette and blackjack beat the best fund.
Of course, you have to know how to bet if you want to win. If I was paying someone more than $100,000 per year to bet for me, I would expect them to back a good proportion of winners. An executive of the worst fund (average loss 18%) was asked on TV recently how his firm could justify six-figure (and in one case seven-figure) salaries. His reply was that good people are expensive. Thank God he wasn't employing bad people.
All of this might be less offensive if they didn't charge fees to lose our money. My daughter had a Saturday morning job for a while and her employer contributed to a fund. The minimum fees exceeded contributions from the first day, so her balance could never rise above zero. Imagine our surprise when she got another job using the same fund to find that the fees had in fact taken the balance to less than zero, so she started the new job with a minus balance in her super fund. Even banks would resile from this much bastardry.
A recent episode of 60 Minutes dealt with some conman who had cheated people out of their life savings. In true TV journalism style, the man was harassed by people with cameras and microphones and the victims of the thief said how they trusted him and how disappointed they were at the breach of trust as well as the financial loss. In the same week BRW magazine carried a story about how every superannuation fund in the country had managed to reduce the value of their contributors' savings. I can't see a difference. Millions of ordinary Australians have the right to be outraged at the betrayal of their trust.