Jeremy Cooper headed the Federal Government’s Super System Inquiry. He is widely acknowledged as having done a terrific job. The final report is here. He is also the chairman, retirement income, of Challenger Ltd, a financial services firm that is Australia’s largest seller of annuities to retirees. An annuity is a promise of fixed number of payments in the future. For instance, I might pay $500,000 for an annuity that makes payments of $40,000 at the end of each of the next 20 years (for an implied return of 4.96% per year). An annuity that makes payments until death is a super-annuity — hence the term superannuation. It was reported in the AFR today that Challenger is on track to sell $1.4 billion of annuities this year, outstripping last year’s $933 million.
It was also reported that Challenger recently launched an advertising campaign which will promote annuities as a safe alternative to leaving pension investments in risky stocks. You can imagine what the ads will be like — “don’t do what I did, I invested in risky stocks and lost my life savings. Be prudent and buy an annuity” In today’s AFR Jeremy Cooper has an opinion piece that argues that Australia’s superannuation system is too heavily invested in equities. Here is a quote from the piece: “We need to question just how much exposure to equities we should have in our superannuation system. Do the returns, even over the very long term, justify the white-knuckle roller-coaster ride that Australian super investors have experienced over the past 10 years?” Mr Cooper notes that 52% of the money in large Australian super funds is invested in equities (about 29% domestic and 23% global equities). Later in the piece he says “The super industry needs to develop ways of making more concrete promises to ordinary Australians, particularly retirees, who should not be expected to embrace the volatility and uncertainty to which they are now exposed, with so few options to protect themselves.”
The second quote makes it very clear that Mr Cooper is wearing his Challenger hat when making these comments. That is understandable — he like most of us — has narrow commercial interests to promote. But the content of the article is not congruent with Jeremy Cooper’s promotion of the broad public interest in the Cooper Inquiry. The clear suggestion that super fund members who have many years to retirement are not well served by a 52% allocation to equities is not right. It is in the interests of both the individual and broader society for young workers to absorb the high risk of equities and receive the commensurately high expected returns.
There are only a few rules that investors in large superannuation funds need to follow. They are:
1. Save enough today for retirement.
2. Take an amount of risk that is appropriate to your current circumstances.
3. Be heavily diversified across asset classes and within asset classes.
4. Optimise payment of tax.
5. Minimize fees.
Rule 2 means that the closer you are to retirement the less risk you should take. But, young workers should take a lot of risk, and that involves holding a lot of equities. Moreover, equities are tax advantaged in Australia as a result of dividend imputation. And, even those near to or in retirement need to recognise that they are likely to be retired for 2 or 3 decades, so their investment horizon is also long. It is well established that one of the most common mistakes of super investors is to not take enough risk for enough time. Jeremy Cooper speaks with great authority on our super system, so he needs to take care that his comments do not suggest investment strategies (too little risk taking) that are highly damaging in the long run.
I don’t wish too seem too critical of Jeremy Cooper because his leadership of the Super System Inquiry was a notable public service. I just felt that it wasn’t clear enough in his opinion piece which hat he was wearing. His piece makes sense in terms of advocating the use of his firm’s products, but it is not wholly consistent with standard advice to pension beneficiaries.