There is an old joke about tourists in Ireland stopping a local in Dublin to ask for directions to Killarney. ‘Well,’ the local replied, ‘if I were going to Killarney, I wouldn’t be starting from here.’

At least those tourists stopped to ask. There has been little obvious evidence that the critics of the Australian superannuation system, and there are many, have stopped to ask themselves what is super’s purpose before criticising it and calling for change in policy. Super policy is easy to criticise when there is no articulated reason for its existence. This vacuum then results in an Alice in Wonderland response – the critic can criticise anything or everything because they make up their own idea of what super is for.

Is the compulsory rate of contribution too high, low, or just right? Is the tax rate on earnings right? Is insurance in super a necessity for manual workers or is it a rip-off by evil insurance companies? Should employers choose default super fund for employees or should an expert panel of ten people have the control over which funds are viable defaults? Should the Future Fund, an institution established purely for the investment management of sovereign wealth, becoming a deposit-taking institution for retail clients?

These are the current on-going arguments going on in Australia about the future of superannuation policy.

Not much is likely to change until we can agree on the purpose of superannuation. It wasn’t always like this – it was clear decades ago, long before Governments became interested. It was a relatively plain part of financial services intersecting labour economics and moral sentiments. Employers found it necessary both morally and economically to allow old employees, particularly those that had spent a long period of employment with the same employer, to retire and live out their lives with adequate resources. Further, the dependants of workers injured or dying needed financial support. These needs were the original reasons that employers maintained superannuation programs.

In recent decades, many people have come to believe that super is a wealth accumulation tool. If you take that approach, what you think makes good policy sense can differ, and in quite significant ways, from policy designed to administer the original purpose of super. Super was a mechanism to meet needs. It has morphed into a mechanism to meet wants.

Wants-based wealth accumulation mechanisms already exist. There is no reason why they need to be replicated under the prudential and tax laws of superannuation. Yet I have witnessed over 30 years a non-stop Punch and Judy show: tax wars, choice wars, default fund wars, SG wars, gender wars, culture wars. Early release of money to assist first-home buyers buy residential property. Early release to all weight-loss reduction surgery. You name a crazy idea about the purpose of super in this Alice in Wonderland era and don’t be surprised to find it has already been publicly argued for by someone.

Not often mentioned in all this argy-bargy is the sobering assessment of Government offices that the demands on the publicly funded old-age pension are not expected to reduce materially in the next 30 years, despite what will then be 50 years of the compulsory system. That would suggest that the objective of making Australians less reliant on the taxpayer and more self-reliant in retirement has not worked. This is probably because Government policy makers forgot to start with the obvious question – what is the purpose of super?

The Royal Commission into Misconduct in financial services in Australia turned its attention to superannuation funds in recent months. It’s fair to say that time in the witness box was uncomfortable for many.

This Commission should mark the end of the gloating. For years, you will have heard self-serving nonsense about how Australia has the best retirement income system in the world, about how it is the envy of other countries, about how it was won as a right for ordinary Australians after a long and bitter industrial campaign. This gloating ought to  stop as the Commission has exposed publicly the many failings of the system. The gloating has been, in the main, perpetuated by insiders – some policy analysts, some academics, fund managers, industry associations, some service providers and politicians, especially former PM Keating and former union boss Kelty.

As far as managing money goes, the Australian system has been good. Investment portfolios are diverse, accessible and low cost. That is it’s one true good quality. As far as delivering retirement incomes, reducing pressure on the age pension, increasing national savings and weeding out unethical practices goes, the system has been miserably bad.

The most obviously desirable, necessary and easily implemented change is to remove the compulsion of the Superannuation Guarantee. Make the decision as to contribute or not contribute one that the employee can make based on their own circumstances and preferences. That would immediately concentrate the minds of the fund owners and operators – they would have to earn and keep the trust of investors, rather than rely on the force of law to guarantee that revenue stream.

Here is the text of a letter of mine to the editor that the Australian Financial Review published last week.

Karen Maley writes that Commissioner Kenneth Hayne has posed the question, “Is incentive remuneration necessary?” in relation to banking. Maley describes this question as radical. I would describe it as a very good question.

Will Commissioner Hayne, having another few months to complete his report, pose two more questions that strike at the core of the cultural problems in Australian banking? They are: 1) Is the Reserve Bank necessary? 2) Is the four pillars banking policy necessary? These questions would render his first one redundant. It is time to have the discussion. A sound banking, monetary and payments system needs neither the RBA nor the four pillars policy. In removing them the potential benefits for the real economy, rather than the financial economy, are material. However, given the timidity of parliamentarians, I do not underestimate the difficulty Hayne would face in putting those questions in his final report.

Most, if not all, institutions now have Inclusion & Diversity policies. It’s fashionable to do so. These policies are entrenched in corporations, government agencies, peak sporting bodies etc. But what does an I&D policy mean and what do they achieve?

I&D policies may as well be called Conformity or Exclusion policies – they are conceptually equivalent and they achieve the same outcome.

To argue for inclusion requires the explicit assumption that exclusion is currently in force: an individual or a group or class is excluded, hence the need to change behaviour to include them. Logically, this requires that the entity or group or influence from which some are excluded can be identified. If it can be identified, then by definition it must exclude someone and has a test to be passed before membership is attained or retained. The consequence of an I&D policy initiative is therefore to change the rules of entry, change the definition of the group and exclude those who no longer meet the amended membership test. I&D is conceptually no different from Conformity or Exclusion. No barriers are broken down – they are just moved into a different position.

The Society of Actuaries published a short piece that I wrote about Australian Retirement Incomes in the May 2018 International Section newsletter. If you are interested in reading it, it is available at this link. 

I want to gather my savings, invest the capital to open a corner shop business, and pay myself a salary while i’m running the business. Should the Government determine my pay? I don’t think so.

Say my corner shop does even better than I had hoped. This year’s profit was terrific. I think I deserve a bonus and pay myself a handsome sum. Should the Government limit my bonus? I don’t think so.

Now I want to expand my shops and open two new shops in the next suburbs. I ask the bank to lend me money to finance the expansion. The bank agrees. Does the bank care what I pay myself? Not much, as long as its loan is repaid. Should the Government care? I don’t think so.

Years later, my business was doing very well and I wanted to release some of my capital back to me and my family. We wanted to have luxurious holidays and drive fast cars. A stockbroker finds investors who want to invest equity in the business as part ownership. We agree and the business now has independent stockholders. Are the stockholders interested in my pay? Yes, they are. They devise a means by which I must report to them what I am to be paid for the next year and they have the voting power to refuse (or sack me). Should the Government care about what the stockholders and I agree to? I don’t think so.

I am now paid in mega dollars. The business has suffered a little in recent years as probably, I am paid more than I am worth elsewhere. Do the stockholders care? Yes. They decide to change my remuneration. In future, there will be a small(ish) base but a big performance bonus if the business turns around. Should the Government interfere and limit my possible bonus? I don’t think so.

The Government has no right to interfere. Not ever. Not for a sole proprietor corner shop and not for a publicly owned institution. It is never acceptable to pander to petty jealousy and try to call it socially responsible policy making. If the shareholders of Company XYZ want to pay their CEO an excessive sum, that is no business of mine, unless I am a shareholder. And therefore, it is no business of Government, unless Government is a shareholder.

Around the time of the GFC in 2009, I wrote a satirical piece about how the switch from defined benefit retirement pensions to defined contribution accounts might look if it were applied in the airline business.  Investment Magazine in Australia published the light hearted piece. This is how it went…

I needed to travel to London. I began my preparations with a call to an airline that I hadn’t used before but that I was keen to try, given its appeal­ing advertising. “Wombat Airways, good morning, this is Margaret and how can I help?”

“Good morning, Margaret, I’d like to book a ticket for a flight from Mel­bourne to London at the end of next month. My name is David.”

“Well, David, I can help, but before we talk about where you want to land, can I ask how much you want to pay?”

“Well, whatever it takes, I suppose. What’s your price?”

“I’m sorry, I can’t tell you that since that would be giving you advice. No, you must tell me how much you want to pay.”

“But you must give me some idea? What if I said $5000; is that enough?”

“It might be, David, but we won’t know in advance.”

“Well what are other people paying? What would you pay if you were me?”

“Look, I can’t tell you. It’s a risk and you have to make that choice; I can’t make it for you.”

At this stage, I was starting to be­come just a little tense, but did my best to be civil with Margaret. After all, she was probably following a script.

“OK,” I sighed, “we’ll stick with the $5000.”

“Fantastic,” she said “let’s pretend that $5000 is enough and see what happens!”

“Margaret, what happens if $5,000 is not enough?”

“If your money runs out, we will ask you to get off. There are an increas­ing number of passengers being ejected these days, so you probably won’t be alone. If you do fail to reach your objective, you will have to rely on a pair of roller skates and a dodgy plastic com­pass to get you home.

Those items are provided by the Government, but only to those people who don’t already have a pair of roller skates and a dodgy plastic compass. They call it their ‘means test’.”

“And if $5,000 is more than enough?” I asked, looking forward to hearing a sensible answer for a change.

“In that case, we will send you a cheque for the balance, less a payment fee.”

“Will you pay interest?”

“Yes, but we don’t know how much. It could be positive or negative.”

I didn’t feel like entering into a discussion about interest and the theoretically interesting diversion about whether interest could be negative. In fact, I just wanted my tickets booked, paid for and the phone call to end. But Margaret wasn’t finished.

“Now,” she said with renewed brightness. “What type of aircraft would you like to fly in? At Wombat, we have a range of options for you to choose from, to allow you to tailor the flight to your personal situation.”

“Margaret, you tell me which one is appropriate, given where I’m going and how much I’m paying.”

“I’m so sorry David, but I’m not allowed to. That would be giving advice. But I can tell you that our different aircraft have different characteristics; some are slower and noisier but they are exceptionally reliable, in that they will get there, but we don’t know when they’ll get there! The really new versions are very exotic, fast and quiet but we’ve lost a few recently.

Their engines have this new device fitted called a cognitive double-quick orbiter (CDO) that can fail unexpectedly but the engineers don’t really know why. It seems some of the pilots weren’t even aware the CDOs were installed.

The really scary thing was that a pilot would report a problem with their CDO on the Los Angeles route and a plane sitting in the hangar at Tullamarine would suddenly collapse under its own weight.”

“Excuse me, does that mean I’m less likely to land in London?”

“Yes, that’s right. There is a full description of all the risks in our Plane Details Specification, or PDS for short. I will send you a copy of the PDS. If after reading it you still have questions, you really should consult a licensed aeronautical advisor. But be careful, make sure your advisor is licensed by ASIC, the Aeronautical Surreptitious Investigations Commission.”

At this point, Margaret clearly felt the conversation wasn’t going as well as it should. She was only young and may have been put off by my surly manner coming over the line.

“Margaret, when I used to fly with one of your competitors, I said where I wanted to go and the airline told me how much to pay. It was easy.”

“I’m sorry, David. We have moved away from a Destination Bound (DB) system to a Destination Concealed (DC) system.”

Bewildered, I thanked Margaret, paid my $5000 and crossed my fingers.