Locked in super means investors are locked out

By David van Schaardenburg

Friday 2nd June 2000

The personal superannuation industry has grown substantially over the past decade. The level of funds managed has gone from $652 million to $7.28 billion in the decade since 1990 - an annual average compound growth rate of 29%.

Much of this has been due to the decline in the corporate superannuation funds.

The growth has also resulted in a greater choice of suppliers and investment strategy.

Consumer pressure has led average fund costs to trend down, though a considerable range between low and high cost providers persists. Enhanced transparency through improved regulation and media interest has led to a highly competitive environment.

While these are all positive trends, there is still a dark collusion between many superannuation fund providers and the government to derive personal super fund investors of a basic consumer right - flexibility.

Legislation and a supportive government office - the government actuary - ensure unless a personal super fund investor has a friendly super fund provider, invested funds are locked in until retirement age, which at the lowest is set at 50 but may often be as high as 65.

Given that full exit flexibility is available in other types of managed fund investments (unit trusts, group investment funds, insurance bonds) as well as most direct investments (like shares), it is rather odd the government insists on locking in just one type of savings structure.

More bizarre is that many savers accept at the time of initial investment that having their savings locked in for potentially several decades is a good thing.

Why is being locked in potentially bad? The world's a rapidly changing place so one can expect in time that:

the individual circumstance (financially) and goals of the saver will change; and
the quality (and possibly ownership) of the fund manager will change.

So why would an investor want to be locked in?

A key element of any highly competitive industry is the view if you do not satisfy customer needs their business will flow elsewhere. With locked-in super funds this obviously doesn't exist. Once invested the manager has a 20-30-year safe earnings stream. The incentive to deliver has gone.

These issues are well known and understood by the retail funds management industry.

In fact, as a result many super fund providers, in the interests of their client base, wilfully disregard the directives of the government actuary (to not allow fund exit except in few circumstances) to ensure their super fund investors have full flexibility to exit.

In contrast, it is shameful some funds and their trustees rely on dated, consumer unfriendly trust deeds to deny investors the right to exit except in extreme circumstance (death, proven economic hardship) before the stated retirement age.

This is shown in a dispute where a nationwide investment advisory firm is seeking to extract their client investments, some invested for nearly 30 years, from a property-based super fund managed by an "award-winning" Auckland-based fund manager.

The issue here is more a moral one: if the investment is owned by the investor, why shouldn't they have full control over what happens to it?

How can investors avoid the lock-in trap?

First, before investing in a personal super fund, investigate what other similar but fully flexible investment funds (for example, unit trusts) are on offer through the fund manager.

Should you still want to invest in a super fund, check the degree of exit flexibility (either redemption availability or portability to another super fund) incorporated in the offering documents. If this is not clearly stipulated, is also widely available plus costless, I would suggest you avoid it.

One key criteria for any investment is full and unfettered exit flexibility.

If this doesn't exist, then investors are assuming an illiquidity risk that is not compensated for by an enhanced return.

David van Schaardenburg is general manager of IPAC, the investment strategy and funds management research company

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