Opt out of the blunder from Down Under

Nick Hubble

Capital & Conflict offers you a simple piece of advice: opt out of the blunder from Down Under.

As the news furore over the immigration debacle reaches fever pitch in the UK, let’s take a look at the nation which immigration rescued. It’s offering a valuable lesson about your personal finances – what not to do. And I’m among the victims.

In 2007 and 2008, Australia experienced a decent economic shock. You might even call it a recession.

But, as the lucky country would have it, immigration surged. Economic migrants from Europe showed up at such a rate, it pushed total GDP growth back into positive territory just before the official definition of a recession could be met.

With UK GDP growth at 0.1% in the first quarter of 2018, it’s encouraging to see the UK government trying to kick long-term residents out… but that’s not what we’re focusing on today.

Immigration can’t cover up everything. Australia’s financial bubble is bursting at last. And that’s where today’s piece of advice comes from. Don’t make the same mistake as millions of Australians. Including me. Not that we had a choice. But you do, for now.

Compulsory savings, coming to a fund manager near you

A past Capital & Conflict covered the secret sub-prime crisis lurking in the Aussie lending market. And how contagion could deliver trouble to our shores. Well, the latest scandal on the front of Australian newspapers today is about the superannuation industry.

If you haven’t heard of it, superannuation is the retirement system that Britons can only dream of. In a nightmare, it turns out.

Just over 9% of Aussies’ pay packets automatically get sent to a fund they choose. That money is then invested for them by the fund. Your super account has its own balance, so it’s yours, but managed for you. In short, it’s compulsory saving that automatically gets sunk into the stockmarket. The rules to gain access in retirement are incredibly complex.

Britain has recently moved to a similar system. You have to opt out to escape the so-called “auto enrolment”, which you can’t do in Australia. I asked.

In the UK’s automatic enrolment system, each company selects the pension fund for their employees. This causes plenty of confusion for people swapping between jobs, as they end up with multiple funds with insignificant balances. Apparently the government still expects you to remain in the same job for life.

In Australia, each company has a default fund, but you can tell your new employer to contribute to your existing fund instead. Funnily enough, finance companies in the UK told the former pension minister this would be just too difficult to implement in the UK. Forcing employers to pay into their employees’ different funds, like they do for bank accounts already, is terribly inconvenient. Unless you’re in the southern hemisphere. And have computers.

Australia’s superannuation system gets plenty of praise from around the world. But lately, its true nature has been exposed thanks to a Royal Commission investigating what’s going on behind the scenes.

The super scandal

As you can imagine, people don’t spend much time thinking about their super. Retirement is years away. The government has implemented the stupid amount of rules for managing super funds to keep those crafty finance companies in check.

I don’t even remember the login details for my super fund. They have my address from eight years ago on file.

As a result of this apathy, people don’t let their new employer know about their existing super fund. Instead, they set up a new one each time they move jobs, probably without even looking at the paperwork. By the time they retire, they have a long list of funds in a long list of places. All with a small balance. It’s the same mess as in the UK in the end anyway…

But that’s not the real problem. There are about £5 trillion of funds up for grabs in the super game. The only thing more attractive is the amount of apathy about what happens to them.

As you can imagine, this attracts some scrupulous operators. Unions and banks own a suspicious amount of super fund management companies. They also sell all sorts of products to these funds. Because the fund itself is their client, not the retiree, they get away with anything.

People don’t realise they have expensive insurance through their super fund, for example. Many never claim, unaware they could.

With the reputation of the industry in tatters, a Royal Commission was recently launched. The government was very reluctant to announce it, to put the preceding drama mildly. Unfortunately, the Royal Commission has discovered some rather horrific practices. The government now looks stupid for opposing its own policy for so long.

Today’s newspapers revealed how super funds are only passing on a fraction of the interest rate return on cash savings kept in the fund. According to the Australian newspaper, super funds owned by banks are making hundreds of millions of dollars by keeping the interest returns of their clients’ money for themselves. One fund passed on to customers between a quarter and a fifth of the return it’s estimated their money actually made.

There’s also been plenty of “fees for no-service” and disastrous financial advice exposed by the Royal Commission.

Why do you care? Because this is the next logical step the British system is heading towards. Auto enrolment with the opt-out is a stepping stone to compulsory savings.

We already know this system doesn’t work, except for fund managers. But that won’t stop the politicians from implementing it.

If you’re saving for retirement in the UK, you can still opt out of this sinkhole now. Ask your employer how.

Time to take charge

The point in all this is that you cannot rely on anyone else to sort out your retirement finances.

You can’t rely on the government pension, with its fiscal unsustainability and rising pension age.

You can’t rely on your corporate pension, because companies go broke and this just leaves the government with the bill.

And most of all, you can’t rely on retirement specialist companies which rob you of your returns.

Personally, I’m sceptical you can rely on financial markets either. At least not in the traditional sense. Buy and hold has got you nowhere in the FTSE over the last 18 years.

If you want to make decent returns, you need to look elsewhere. Either new places to invest in, or new ways to make money in financial markets.

I know, that sounds like an awful lot of effort. But it needn’t be. Not if you watch your inbox closely this week. Solutions are coming your way.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Economics

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