I have an opinion piece in The Age today about what our market turmoil means for our superannuation system [over the fold].
New tools needed to make super choices
The Age, 24th January, 2008.
THE sharemarket, yesterday’s bounce notwithstanding, is still suffering its biggest downturn in a decade, with a 20% decline in just over two months.
What is significant about this one is that it is the first slump since the Government handed people control over where their superannuation went.
Gone are the days when retirement savings were linked to government discretion. No longer can you blame your employer if things go awry. This time, savers had a choice.
The difficulty is thinking about what that choice really meant. After all, all funds look good when the market is rising steadily. Indeed, it is hard to distinguish between the low-risk, stable shares strategy and the high-risk, growth strategy that funds offer. Up until November, both did very well.
While the focus of the last few days is on the average decline in stocks, some funds will have done better and others done worse than that average. For those that have done worse, their customers will be asking: why? There is no good answer.
While there are funds that employ highly sophisticated techniques utilising analysts with mathematical rather than financial backgrounds, there is a healthy dose of sheer luck involved. Good fund management will minimise that aspect by diversifying risk.
However, when there is systemic risk — as accompanies the prospects of a recession — it is hard to know where to turn. Evaluating a fund’s strategy for dealing with systemic risk relies on knowledge about how it makes the investment choices it does, what trigger points it uses to change course, and the experience of those in charge of your dollars. And even with that knowledge, it would take some expertise to distil what that means for consumers.
If this downturn persists, it will start to affect the retirement plans of a large share of the population. And with the Australian Government’s system of forced and highly incentivised private savings, questions will be asked as to whether a responsibility comes with that to ensure consumers are getting what they think they are getting in terms of risk management.
There are no clear solutions; we can only point out that the choice we have endowed consumers with does not fit in to the kind of decision they may make well.
That is not to say that such choices should be removed from them. Instead, it requires them to be given tools to enable them to make that choice.
It wouldn’t surprise me if we saw calls in the near future for government certification or rating of a fund’s risk profile based not on performance but on what is going on under the spreadsheets.
Joshua Gans is professor of management (information economics) at Melbourne Business School. He maintains a blog on these issues at economics.com.au.