We live in a world of outsourcing – not just at a corporate level but in our personal lives as well. A modern, time-poor Australian can pay someone else to mow their lawn, wash their car, clean their house and look after their children. It’s even possible to buy a dog and then pay someone else to walk it for you.
The more income a person has, the more they can afford to ‘buy back’ their spare time by paying a professional to take care of the things they would otherwise have to do themselves.
This begs the question: why on earth are so many people with above-average incomes choosing to spend countless hours of their own valuable time managing their own super fund when there is a small army of qualified professionals who are willing to do it for them?
The answer to this question can be traced back to the very beginning of ‘defined benefit’ superannuation, and it is driven by a quirk in human psychology.
Employees with defined benefit funds didn’t need to worry about share market volatility, or the rising cost of living affecting their retirement. They had a guaranteed income that they could count on for the rest of their life.
Unfortunately, as well as not being very well suited to a modern, dynamic workforce, defined benefit pensions could also be catastrophically financially damaging to the companies offering them. This was particularly true for companies that shifted from a large workforce to a smaller one over time.
In the US, General Motors’ steady reduction in employees over the past 50 years has led to a situation where it now has 141,000 workers on the payroll and 453,000 retirees receiving a benefit. As a result, GM is now commonly referred to as “a pension fund that also makes cars”.
This kind of experience encouraged private sector employers around the world to switch from defined benefit funds to defined contribution funds. The risks posed by market volatility, inflation and longevity are now borne entirely by the employee.
This shift in risk ownership has triggered one of our more curious human psychological responses. It seems that many people’s perception of risk is dictated by their level of control, rather than the reality of the risk itself. In the same way that many people feel perfectly safe behind the wheel of a car but are anxious about being a passenger in an aeroplane (despite the contradiction of air travel being safer), many people feel apprehensive about having their retirement savings controlled by someone else (no matter how qualified that person may be) when it is the retiree themselves who is the one who suffers the consequences if something goes wrong.
Some commentators have recently suggested that SMSFs are becoming a kind of “status symbol” rather than an appropriate investment vehicle. But how much of the demand for SMSFs is driven, not by fashion, but by a desire to manage risk?
Martin Heffron observed recently “as people become aware that they have responsibility for retirement income funding…I think it’s a natural human reaction to want control in order to guarantee your funding…and so I see that as being the big driver behind the growth in SMSF.”
It seems that outsourcing is all very well, but when the stakes are high, many people prefer to have their hands on the wheel rather than be sitting in the passenger seat.
David Barrett, principal consultant, portfolio solutions, Bravura Solutions