30 March 2024
1300 794 893

Australia, we have a COVID-19 super problem

Peter Switzer
3 April 2020

We have a super problem that no one ever imagined. It’s not only a problem of the super funds but one made worse by two innovations over the past few decades — the arrival of the Internet, and media educators like yours truly and others who bob up on TV and radio shows, as well as countless newspaper columns and wealth-education websites.

When I began broadcasting on Triple M in 1987 after the stock market crash, Ross Greenwood would soon join the M’s rival, 2Day, in Sydney and Fox in Melbourne. Paul Clitheroe’s TV show Money would kick off in the 1990s and be a top rater. Australia had discovered the appeal of money. We started to understand that by knowing money ‘stuff’, you could make and save money, potentially leaving you wealthier for the experience.

Then Prime Minister Paul Keating introduced compulsory super and Aussies were on the road to being millionaires by retirement, provided they had a good performing fund and weren’t ripped off by very high fees.

This is where the industry super funds made a big competitive difference. They not only cut fees under 1%, they actually brought very good returns. The aftermath of the Hayne Royal Commission saw the banks set their sights on going back to banking and reducing their exposure to wealth-building, but this Coronavirus has created a big problem for super funds.

And it has been made worse that a more educated super saver now is powered by the Internet and their computer or smart phone, so they know how their nest egg is growing and going. This has meant that super members can switch to cash very easily. And that’s what the 38% fall in the stock market has encouraged thousands of Aussies to do!

On top of that, the Morrison Government’s stimulus package offering, where a super member can withdraw $20,000 in two $10,000 slugs (one before 1 July and one after 1 July) has meant that super funds have been caught short of spare cash!

A big story a couple of weeks ago was the rush for members to change from being say in a balanced or growth fund, which gave great returns in 2019 when our stock market was up nearly 20%. But this recent 38% fall has scared the pants of many super members.

There’s an old saying that a “little bit of education can be a dangerous thing” and I was worried about the ease at which super members could go to cash via their computer because the GFC showed me that too many people lost twice.

The first loss was when the stock market fell over 50% and because they feared losing everything, they went to cash. Money was so short, I recall seeing a Westpac term deposit advertisement in Collins St. Melbourne, in late 2008, which was like 6% for five years. Those offers didn’t last but from March 2009, the stock market rebounded over 30%!

Staying in super was the best option, as the next chart of long-term super fund returns show. Note how the super funds only fell 21.5% in 2008, when the stock market dropped over 50%.

And look at the returns that followed, which shows that super fund members should have simply sat tight and waited for the rebound of the stock market.

The combined force of members wanting to go to cash and cash-strapped employees seeking to draw out $20,000 from their super funds has the CEO of Australian Super, Ian Silk, talking to the Reserve Bank to help out.

Ian Silk says the super industry can cope if the drawdown is $27 billion but if ends up being $50 billion then the super funds will need a liquidity lifeline.

Now be clear on this: your super is safe — the Government would ensure that. The potential problem is that the industry never expected a pandemic and the lockdown policies that the Coronavirus has delivered on the economy’s doorstep.

This will lead to lower returns for a year or two, after sensational numbers since the GFC in 2008. But what the super funds might need is an injection of cash from the RBA so they don’t have to sell too many stocks and other assets, which would compound a whole lot of problems for share prices and even property prices.

What could be worrying many is the comment from ex-CBA boss and now Chairman of AMP, David Murray who says “super is busted” in today’s AFR!

David, who’s a very smart guy, has always worried that super doesn’t end up being a forced or mandated pension for retirees. He doesn’t like retirees becoming amateur fund managers because it leaves them too exposed to the stock market, which on that score he has a point.

The ex-Treasury head, Ken Henry, agreed with David that most Australians needed to have their super roll into an annuity-like product, which would have promised lower returns but would’ve have delivered reliable flows of income.

It’s a nice idea but it’s like the old song: “How ya gonna keep ‘em down on the farm after they’ve seen Paree?”

Clearly, this damn pandemic will force governments to ask voters to accept some gutsy policies to pay for the rescue programme, such as a 15% GST and maybe some super changes, which might bring up the scary topic for retirees of franking credits! But forcing retirees to take mandated pensions out of their own super money would be a policy that would kill a government even if the Opposition agreed to it in a bi-partisan way.

To sum up, our super system is good. The RBA might have to help out with some cash advances. It’s like a good business like Qantas that might need to borrow because of this Coronavirus negative effects and plenty of lenders would be happy to do it, because it’s a sound business that has been forced to hit a curve ball that has never been thrown at them before.

My best educated counselling would be “sit tight and wait for the stock market rebound”. Historically we have seen our market comeback between 30% to even 80%!

Comments
Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
Subscribe
1300 794 893
© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
shopping-cartphoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram