Originally slotted at 3%, the employer superannuation guarantee (SG) requirement to pay money into a super fund on behalf of employees increases to 10.5% on 1 July 2022 en-route to 12% by 2025. For all its complexity and shortcomings it’s an extraordinary policy achievement that requires most people to save for their later years and increases the country’s capital and wealth.

The SG scheme began on 1 July 1992 with total super balances elsewhere totalling $148 billion. Those 23 million accounts are now worth some $3.4 trillion. The scheme’s architects would be amazed that at $1.1 trillion in industry funds and $894 billion in SMSFs the two entities are way ahead of retail funds at $688 billion in managing super assets. More on this milestone next week.

New Retirement Income Strategies

Yet another big superannuation date next week when superannuation funds (but not SMSFs) are required to provide retirement income strategies that are tailored to the needs of their members. The Covenant is the next stage in the evolution of Australia’s retirement system, and super funds must support members to:

• Get the most out of expected retirement income
• Mitigate anticipated risks to the sustainability and stability of their expected retirement income
• Allow flexible access to funds in their retirement

The difficulties are obvious. Each retiree is unique but so are their plans. She said many pre-retirees do not know when they will stop paid work. Some retirees will want to die broke while others will look to leave a generous bequest. The Bank of Mum and Dad might be open for business in some families but not others. Some retirees are fine with market risk, while many are terrified of it. The age pension is anathema to some, a sacred right to others. But a greater part of humanity will eventually enter a point when health will be equal in importance to wealth. What does a policy on a website allow that infinite variation?

A major point that is missed is that at a minimum, the super fund will know how much the member has in super, but typically, retired members have significant assets outside of super, like the family home. The recent Investment Trends/Vanguard SMSF survey provides some clues about this inside super/outside super balance.

How will all these cohorts even be recognized in a master policy that’s issued by a big fund with millions of people? Anyone clicking on the website of their fund on 1 July is going to be disappointed. It is the beginning of a multi-year process, and at this point next week it is more likely to include a statement of principles and a plan to do something more in future than bespoke solutions for individuals.

Implementation Challenges

Considering 1 July 2022 is just a week away, APRA's implementation timeline seems like an overreach:

With super funds not only questioning what they can achieve with such a scattergun approach but not examining how they meet the legislation obligations without running foul of having to provide personal advice.

I was recently reminded of this point during an interview with the Chief Investment Officer of a large superannuation fund. He was ranting about a meeting in C-Suite last week where the CMO (and the other Cs in the room) had pitched a new marketing play focused on member engagement. From the CIO’s perspective, the majority of their members didn’t want to see more information about the options in the fund or their account balances. People should leave their super there to grow over time, while they focused on... other things in their lives, he said. He was annoyed that the very same communication urging members to be patient and ‘stay the course’ also described adverse market conditions and alternative investment options.

Are members with their letters for 30 June 2022 reading “so and so balanced slipped for the first time in well over a dozen years (yes bonds AND equities down) with more slippages to come, don’t be alarmed just look at your long term returns”? Will they go to cash or is the lesson here that it’s not a time to sell even in the face of sharply higher interest rates and a recession? Most in the industry have no clue what to do so what hope does a member who reads a shiny piece of communication a few times a year have? As John Lennon wrote:

“Life is what happens to you while you’re busy making other plans.”

Crypto Collapse and Market Turbulence

As the markets correct from the exuberances of 2021, many people who got on board the get-rich-quick bandwagons are paying the price. Among the worst practices, we once cautioned against listening to the advice of actors and influencers for whom crypto is paying. What does anyone even know about how to value a cryptocurrency, let alone a Hollywood actor. We highlighted Matt Damon declaring “Fortune Favors the Brave” in a lavish Crypto.com ad from October 2021, and Bitcoin's price is down 70% since that ad. Still feeling brave? The wider crypto economy has lost trillions of dollars from its November 2021 peak, with plenty of scammers profiting at punters’ expense.

Some of their losses should be extreme; 10% of all companies in the Russell 3000 are down more than 80% from their highs, and 121 companies in that index have lost more than US$1 trillion in value. Don’t know them. Many of these are well-known to Australians, such as DocuSign, Block, Roku, Rivian, Coinbase, Beyond Meat, Virgin Galactic and Robinhood, and they were supposed to become global disruptors. Certain companies now need to ask if their next infusion of capital will be enough to cover continuing trading losses.

Australian Outlook

The Australian market typically tracks broad movement in the US, and the effects of inflation on US consumers is dramatic with many common household expenses rising an astonishing 26% in the May data of year to date, a level basically in line with a peak US household cost in terms of annual headline inflation in 1980.

This week our own central bank Governor Philip Lowe spoke to the American Chamber of Commerce. He raised his forecast for inflation to 7% for the December quarter, but argued more optimistically with three reasons inflation would moderate in 2023:

• Supply-side disruptions in the global economy from the pandemic are slowly being resolved.
• Global monetary policy tightening, including in Australia.

He pledged to push inflation back to the 2% to 3% range as “it is important that the higher rate of inflation this year does not feed through into ongoing inflation expectations.”

In question time he admitted that the market had been better predictors of inflation and interest rates than the Reserve Bank, but was highly sceptical that the 4 percent being priced into forward rates toward the end of 2022 was likely. It would take "the most forceful and rapid hardening of monetary policy that we've ever seen in the inflation targeting regime" and the Board "would have to raise interest rates by 50 basis points at each of the last six meetings of this year, and have a 75 basis point increase somewhere in there".

Please do not take this as advice as Lowe has been wrong on rates for six months and counting but he was virtually impossible to challenge here.
Graham Hand

In This Week’s Articles...

To celebrate 30 years since super became compulsory, we have a closer look at how SMSFs have evolved into a portfolio option and are introducing a younger demographic who want to make their own calls. See how the same people hold their investments inside and outside SMSFs.

Anton Tagliaferro received a Queens Birthday honour last week so for a study in similarities return to an article he wrote in 2006. Plus opportunities that he sees for 2022.

Trent Koch notes the value of investing in assets like toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres that demonstrate their virtues in a stormy market.

Banks have been whipsawed as investors sift through the benefits of higher rates for lenders against the risk of bad debts mounting in a slowing economy. Hugh Dive thinks bank shareholders will be rewarded if they ignore the current market noise.

Whether you are looking to appoint an attorney down the line, or have already been appointed by a loved one as their attorney, it is vital to understand what this important legal framework entails, writes Anna Hacker.

The Australian housing market is considered increasingly unaffordable and the researchers say home ownership may become unattainable for average Australians. Analysis of buying vs renting for Australians on the aged pension, by Kirsten Wymer and Edwin Lung.

Due to so many changes, this may be a tough tax time. You can read the entire article here: PAYG Employees: What you need to know about COVID concessions