Despite being run by a highly capable pool of investment talent, industry expert Wayne Fitzgibbon - who’s held consulting roles at Mercer, Macquarie and BT - believes Australia’s super funds sector, with its implied culture of managing and understanding risk, still struggles to deliver the right retirement outcomes for its members.
Fitzgibbon walked Azzet through some of the fundamental flaws entrenched within the super fund system and what’s needed to fix them.
Azzet: Despite material progress to investment strategies and solutions that allow for income generation, and the mitigation of inflation and longevity risk, since the retirement income covenant was introduced in July 2022, what continues to hold the super industry back?
Wayne Fitzgibbon: It’s clear who’s to blame for this failure and it’s not those at the coal face.
In my view, the failure rests with politicians, well-meaning but over-zealous regulators and the inherently bureaucratic nature of the governing boards and committees of super funds.
Azzet: Can you unpack some of the issues confronting the sector as you see them?
WF: Starting with politics, the Coalition had sought to undermine the dominance of the industry funds since the Superannuation Guarantee was born.
The absurdity of the Your Future, Your Super (YFYS) performance test and the draconian penalties that failure entails has served only to reinforce the inherent tendencies of trustees and CEOs to run with the herd.
Azzet: That may well be true, but didn’t the last Labor government along with the regulator attempt to move the dial forward on super?
WF: The “tweaks” made by the last Labor government were little more than a grudging acknowledgment of the industry’s justified grievances.
Maybe the new one will be more bold.
But when it comes to regulation, the ongoing failure to address the critical issue of return versus risk means members nearing, or in retirement are in products which have a high probability of significant loss of capital.
The problem with standard risk measures is they won’t reveal the number of negative returns, the magnitude of that risk – 2%, 5% or 15% - and how close together those losses will be clustered – aka sequencing risk.
As a result, there are a lot of super fund members who think their portfolios are infinitely safer than they are and no one within the sector wants to tell them otherwise.
Simply identifying the number of years where returns could be negative means nothing. What’s important is how much you could lose and the likelihood of that happening.
Azzet: Isn’t governance supposed to be in fund members' interests, what's gone wrong here?
WF: When it comes to governance, there’s simply too much bureaucracy.
Fewer board and committee members with more expertise is what is required, and more responsibility should be delegated to those making the investment decisions.
Such a shift is not as irresponsible, reckless or as radical as it might sound.
More and more institutional investors are making the subtle but important move away from the strategic asset allocation (SAA) model of investment strategy to the total portfolio approach (TPA).
Azzet: Can you explain the differences?
WF: Though the differences are mostly related to a higher degree of delegation in the governance model, TPA is also inherently more flexible, often leading to much more material changes in asset allocation, including exiting some asset classes altogether.
It’s the SAA approach that addresses the fog of uncertainties facing an investor by assuming that the short term “noise” in economies and markets somehow washes out over time and that some mysterious force steers long-lived metrics to mean revert – aka back to an average or historical mean over time.
By comparison, the TPA approach, though not often recognised as doing so, seeks to identify strategies and opportunities where there is less uncertainty about outcomes. In this sense, it is more short term but also more realistic.
Azzet: So where’s the missing piece in this jigsaw?
WF: The key point is that all the economic and financial theories we have been taught are underpinned by the assumption of the "general equilibrium” model — an economy-wide focus that estimates changes in key economic indicators.
Ironically, the realisation that such a thing has never existed, and could never exist in evolutionary time, is conveniently overlooked.
Though rarely recognised, it implies that we know more about the distant future than the near future.
Obviously, this defies common sense.
Azzet: So that said, can you pinpoint where urgent change is needed?
WF: For Australians to reap the benefits of one of the best conceived retirement systems in the world, urgent change is needed.
Politicians needs to foster competition among providers rather than overtly or covertly seeking more and more consolidation.
Regulators need to throw out the textbooks they have read and start thinking ahead rather than perpetually fighting the last war.
And those responsible for investing other people’s money need to look inward and face up to the reality that bureaucracy is the enemy and that empowering those in the trenches is the key to success.
