SANDY ALOISI:
We saw the Treasurer, Wayne Swan yesterday come out and say that Australia is better placed than most countries to withstand the current economic turmoil that we all find ourselves in. This is after the ANZ announced a write-down of about $2.2 billion. And Australia's big superannuation funds suffering their biggest monthly fall in value since the arrival of compulsory super. That was 16 years ago - it seems a long time ago now - dragged down by the battered local and international share markets.
MIKE CARLTON:
So in the next few weeks or so, you will be getting a letter from your superannuation fund, very apologetic saying, well perhaps you didn't do quite as well as we'd expected and so on, which will basically see your superannuation investment going backwards, and that won't be good news for people about to retire.
SANDY ALOISI:
Senator Nick Sherry is the Federal Minister for Superannuation and Corporate Governance. He's on the line.
Good morning, senator.
NICK SHERRY:
Good morning Mike and Sandy, good morning to your listeners.
SANDY ALOISI:
You can understand how people would be feeling this morning, having heard that superannuation funds have suffered their biggest monthly fall since super became compulsory, can't you?
NICK SHERRY:
Well I certainly do. I mean millions of Australians are going to be receiving their statements over the next - it's actually six months, it depends on the fund - and their closing balance will be less then their opening balance, and there's no doubt that this is the first time that millions of Australians would have seen their fund account go backwards. So, we're seeing much wider and deeper negative rates of return. And this has been caused of course, by the US sub-prime financial crisis which has hit the stock markets worldwide, very hard.
SANDY ALOISI:
Should we be worried?
NICK SHERRY:
Well superannuation is a long-term investment.
MIKE CARLTON:
Not if you're about to retire, it's not.
NICK SHERRY:
Well it's a still a long-term investment. I'll touch on that in a second. You're in the system for up to 35 years and it's the five to seven year rate of return that is important, so let me give an example. If you put a dollar into superannuation six years ago, a year ago it would have been worth $1.70, today it's worth $1.60. You've still had very good long-term growth. It's gone from a dollar to $1.60. That's the important aspect of superannuation. It's the long term rate of return.
Now if you're about to retire in the next year or two, certainly - and you'll draw down on that money over the next 20 years, over the next 20 years the draw-down will occur. So, we know that the long-term rate of return has been good for six years out of seven. And the upside, the longer term upside is much greater than the one year and six which is negative.
MIKE CARLTON:
All right, so the last what, four or five years, we had returns of 13, 14 and even maybe 15 per cent. It's going to go back this time at around about six, seven per cent, but basically you're ahead, that's what you're saying?
NICK SHERRY:
Yes. As I say, a dollar into super, six years ago was worth $1.70 last year, now it's worth $1.60. It's still grown from a dollar to $1.60. And, as I say, it's over 35 years, the investment and that long-term rate of return in Australia has been very good, the real rate of return after inflation. And I do think it is a mistake for people to focus just on the yearly rate of return, not just in the current circumstances.
MIKE CARLTON:
Fair enough, fair enough.
NICK SHERRY:
I've long argued over the last 20 years of my involvement in superannuation. Don't look at the yearly rate of return. Even when things were good, when you were looking at 10 to 15 per cent, look at that long term six to seven year rate of return.
MIKE CARLTON:
Maybe what you should be looking at is the fees they charge you for managing your money. What do you think's a fair fee, percentage wise?
NICK SHERRY:
Well what I do know is the fees vary considerably from various sectors of the industry and from fund to fund.
MIKE CARLTON:
Yep.
NICK SHERRY:
And obviously that impacts on the rate of return. We know the long-term rate of return, in some funds, is much better, much higher than other funds. And in part, that's because of the fees that are charged.
Now what I've indicated is, I want a long hard look at the system. The system's now 20 years old, not 16, it's 20 years old. We've got our period negative rates of return. Why have we got funds that are performing long-term, more poorly than others? Now there's some complex reasons for that and that's reflected in what I would consider to be excessive fees and charges.
MIKE CARLTON:
Well what's excessive? I mean the rule of thumb seems to be anything over 1.15 per cent's excessive. Would you agree with that?
NICK SHERRY:
Well treasury use an average figure across the system of 1.25, one and a quarter per cent.
MIKE CARLTON:
Right, and that's about what it should be?
NICK SHERRY:
Well I think it should be lower than that. I think we should, in a mature system that is 20 years old, we need to get the fees and charges down below an average of 1.25. So frankly, anyone who is paying much in excess of one and a quarter per cent, needs to have a long hard look at the value of the fund to make sure that they're getting value for money.
SANDY ALOISI:
And possibly switch funds?
NICK SHERRY:
Well yes, but I'd urge caution on that. What could happen at the present time is people could switch funds, or alternatively switch the investment within the fund. So, if you're in a fund which has got an equities option, the share market, which hasn't done well in the last year, you switch to cash or bonds, in the long-term, we know from the long-term figures that that's to your detriment.
So, I would urge fund members, before you make any decisions on switching funds or switching investment option within a fund, to get some good advice from the fund or an adviser about what is the best thing to do in those circumstances.
MIKE CARLTON:
Okay senator, thanks very much indeed.
NICK SHERRY:
Thank you for your time. Good morning to your listeners.
MIKE CARLTON:
Yep, thank you.
NICK SHERRY:
Bye-bye.
MIKE CARLTON:
Senator Nick Sherry, Tasmanian ALP Senator and Minister for Superannuation.