Becoming more responsible

In 1992, when compulsory superannuation was introduced, it seemed everyone was in accord with its objectives. Australia would get a universal retirement system with the aim to make people self-sufficient in retirement and, as a side benefit, give Australia a growing pool of savings.

It was also understood – and widely accepted – that the system would be underpinned by tax concessions, and that the Superannuation Guarantee (SG), would climb, first to 9% and then to 12%. Indeed, some of the scheme’s architects, notably former Prime Minister Paul Keating, urge a 15% target.

More than two decades later, a scheme that was lauded as one of this country’s great economic reforms – and a critical factor in Australia not slipping into recession during the Global Financial Crisis – is being questioned. In particular, three factors are coalescing to undermine the very legitimacy of superannuation.

First, the decision by the Abbott Government to twice delay the increase of the SG to 12% -- on the second occasion arguing it was better for people to have the money now, not latter – is weakening people’s faith in the system. Second, there is a mounting criticism of the tax concessions afforded superannuation; the argument is they are disproportionally weighted in favour of the wealthy. Third, the fact that about 80% of retirees still get part of the pension is denting the notion of self-sufficiency.

That the Government appears to be backing away from superannuation as our primary retirement savings vehicle is happening at the very time when Australians are having to become more responsible for their own financial security. Even in a universal superannuation system, people are asked to make decisions such as asset allocation, annuities, etc; this responsibility will be compounded if superannuation assumes a lesser role.

What this all means, of course, is that people need to become more financially literate. It has been the catch-cry from successive governments for years, but little seems to happen in order to achieve this outcome; the end result is that people will have assume this responsibility. In essence, it means knowing how to access information and then how to use it to make financial decisions that dovetail with their long-term life goals.

In the age of the Internet this would seem simple; certainly this is where people are increasingly going to access information. Google “fixed interest” and there’s an encyclopaedia of information. But is it the right information?

What is becoming quite apparent is that the product manufacturers and service providers are acutely aware of this trend and are presenting information which, on the surface, meets this investor need, but in reality has far more to do with a subtle sales pitch than educating the investing public.

Make no mistake. The finance industry is filled with smart people who know how to market their product or service; they understand what appeals to investors and how to convey those messages. This reality was highlighted in the Financial System Inquiry draft report.

This is why financial literacy has to be about more than just educating the broader community about the difference between balance and high growth funds or how fees can have an impact on your investment returns. This is a good starting point, but in a financial world that is becoming increasingly complex it is hardly enough.

People need to know how to read between the lines and dissect financial advice. For example, to be able understand the features of a financial product the possible outcomes and whether it’s the right fit for their investment portfolio.

This is not easy; it involves making judgment calls where experience is often the best teacher. As I have said, much of the information on these issues comes hand in glove with a vested interest. Adding to the problem is the fact that the different government sites typically concentrate on factual presentations and bypass the many nuances that investing inevitably entails.

There is no simple solution to this pressing problem. Legislative safeguards to protect consumers have a role to play, but a well-educated investing public is the best defence. What needs to happen is to have more “pure” financial education on the Internet – and for people to know how to access it.

George Lucas is managing director of Instreet Investment Limited. He has over 24 years' experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products.He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.