Illustration by Zeg | Click to enlarge
I accept that some readers may not see the red flag that I see waving all over the following story.
So be it.
In my view, what we have here is a clear preliminary step down the path to government “intervention”, to “save your super” from the risks of the “volatile” sharemarkets.
First by “encouraging”, later forcing, your super fund to invest where the government dictates is a “safe” place for your retirement savings.
That could be the “safety” of government bonds.
Or perhaps, as strongly hinted at by this story, it could be the “safety” of bonds issued by our banking system … who just happen to be “overleveraged” according to the ratings agencies, and recently pitched threatened the government to help them with additional sources of funding in order to “save the mining boom”.
The ‘softening up’ process, the art of steadily planting seeds in the public mind and preparing them for a future event, is called “perception management”.
Here is Business Spectator’s Stephen Bartholomuesz making the argument for the government … prompted by a speech from the former Finance Minister Lindsay Tanner, in which he clearly threatened “government intervention” to force super funds to invest where the government wants them to (more on Tanner’s threat below):
Former federal finance minister Lindsay Tanner may have been overstating the risk of government intervention to correct a perceived bias towards equities within superannuation fund portfolios yesterday but the issue he was highlighting is worthy of further discussion because it contributes to the debate about the need for a developed corporate bond market in Australia.
In a speech to the Ownership Matters conference in Melbourne yesterday Tanner actually approached the issue of the overexposure of super funds to equities from that starting point – the absence of a developed domestic corporate bond market.
The disproportionately high levels of exposure to equities in most balanced fund portfolios is only one strand of the explanation for the absence of a functioning domestic bond market, albeit a material one.
During the great decades-long bull market in equities leading up to the global financial crisis, the bias towards equities in most super funds generated returns that, from a long-run perspective, were aberrational. The GFC reminded investors, and super fund members, that while equities might deliver higher returns relative to most other asset classes over the long term they do so because they carry greater latent risk.
As the population ages, the tolerance for risk will decline. Indeed, with the GFC as a wake-up call, it has already declined. Hence the deluge of funds that has poured into term deposits and other fixed interest securities as investors and super funds have been introduced, painfullly, to the concept of risk-adjusted returns.
Translation: For decades, everyone’s super went into the sharemarket; thanks to the GFC everyone has lost a fortune; now, everyone is more risk averse, and so their money is going into lower risk investments like term deposits.
For the foreseeable future the environment for equity markets is likely to be quite different to that which prevailed before the GFC.
That would suggest that, particularly for the demographic bulge moving towards retirement, the appetite for equities will diminish and therefore the proportion of equities within fund portfolios will trend and remain lower than it was pre-GFC.
As I was saying.
And now – for those with eyes to see – the red “danger!” flag appears (emphasis added):
We’ve already seen a flurry of listed corporate bond issues earlier this year as companies have capitalised on the risk aversion and desire for yield of investors, particularly the rapidly-growing self-managed fund sector.
If the major banks were to issue listed bonds, and the federal government ever delivers on its promise to facilitate the listing of Commonwealth government securities – which would provide a pricing benchmark for all other issues – a properly functioning, liquid corporate bond market that can be accessed by retail investors and SMSFs could be developed, one which might also encourage the large super funds to become bigger players.
As regular readers know, this clearly hints at exactly what I have long argued is the inevitable fate of Aussies’ super. Our all-knowing, all-caring Big Brother government – whether Labor or Liberal matters not – will decide to “help” you, by creating mechanisms to redirect some (and eventually, all) of your super into “investments” that the government deems to be “safer” than the share market, and/or “investments” that are “in the national interest”.
They already tried last year, by “encouraging” super funds to invest in their “nation building” infrastructure programs like the NBN. Fortunately, the super funds were smart enough to resist.
But when push comes to shove, you can be sure that the government will move on from “encouraging”, to enforcing.
For your own good, of course.
Back to Batholomuesz:
Given the post-GFC environment for the major banks – they are holding a lot more capital, more and more expensive liquidity, experiencing higher funding costs and face the imposition of a simple leverage ceiling within an economy where households and businesses are deleveraging and demand for credit is therefore very weak by historical standards – it is unlikely that they will return to intermediating mid-teens credit growth any time soon.
Indeed, having had a nasty experience during the GFC, when their own overexposure to wholesale funding markets highlighted their own vulnerabilities, it is likely that the banks will manage their balance sheets far more conservatively in future than they have in the past, with an acute focus on the stability of their funding.
One of the reasons the major banks built up their reliance on offshore wholesale funding was the increasing diversion of Australian savings from bank accounts to super – and a majority of it into equities – as the super system grew over the past quarter of a century.
Bartholomuesz clearly argues that the banks are overreliant on offshore funding because you and I preferred to have our super in the stock market. The thinly-veiled implication is that the banks’ current problems are really our fault, you see. And the unstated implication being, that it makes sense for our super to fix that problem now, by redirecting it into bonds issued by those “safe as houses” banks.
More of those funds within the super system will, if fund members and their trustees shift to a more balanced and defensive posture and (thanks to the GFC) have a better understanding of risk-adjusted returns, become available to both the banks and corporate borrowers.
And there you have it.
We all just need to “have a better understanding of risk-adjusted returns”, and everything will be rosy … we will want to have our super invested in bonds issued by the big banks.
Even if it is just a “relatively modest” amount of our super:
Given the size and growth rate of the super system, relatively modest re-weightings of fund portfolios away from equities to fixed interest securities could have very significant impacts and could – indeed, should – occur without any need for government intervention.
That red flag is waving a little more strongly now.
And if we still don’t want to have our super propping up the banks?
Bartholomuesz’ final sentence rings out like the death knell I believe this article signals:
There probably aren’t too many super fund members who’d be enthusiastic about the prospect of Wayne Swan dictating how their savings were deployed.
Indeed.
Won’t stop him though.
Take the carbon tax CO2 derivatives scam as a case in point.
And if we consider closely what Lindsay Tanner wrote in the Australian Financial Review yesterday, then I think it is crystal clear what the government has in mind:
As the vast sums involved here are compulsorily directed to a particular form of saving which enjoys preferential tax treatment, those managing the funds can hardly go on about the sanctity of the free market. As concerns about corporate funding rise, and worries about risk in our super system mount, the only guaranteed way to avoid government intervention is for the major players to deal with the issues themselves.
For those with eyes to see and ears to hear, that is a clear threat to super fund managers.
Redirect Aussies’ super into propping up the banks.
Or the government will make you.
