“AT least 50 of Australia’s largest companies face a combined $25 billion shortfall on company superannuation funds, brought on by plunging bond and equity markets.”
So The Australian newspaper reported on Tuesday. These include AMP with a deficit of $120 million, and Westpac with a deficit of $473 million.
Trumping those is Rio Tinto with a whopping $3.6 billion shortfall.
According to the article, it quotes David McNeice from consulting firm Watson Wyatt as saying, “At June 30, 2008, the companies in our study were holding $58 billion in defined benefit superannuation liability and backing that with $56 billion in assets.”
Of course, at June 30th 2008 the Australian stock market had only declined by about 25% from the peak. Since then it’s down by about 40%.
So what’s the estimated shortfall now? Well, according to McNeice “our analysis shows that the modest shortfall of less than $2 billion would have increased to about $25 billion over that six-month period, driven by a combination of falling interest rates and falling values in financial assets.”
In other words, the assets backing the liabilities have fallen from around $56 billion to $33 billion.
But in terms of underfunded obligations it’s chickenfeed. Because one thing’s for certain. If the private sector can’t manage a simple trick like matching off assets against liabilities there is little chance that our friends in the public sector can do any better.
The Future Fund website tells you “As at May 2007, this liability stood at around $103 billion and it is expected to grow to around $148 billion by 2020.”
A sneak peak at the government’s balance sheet for last year tells us the liability has increased to $108 billion. That’s a 5% increase in just over twelve months. And over the previous four years the liability has increased by a massive $21 billion.
That’s half a stimulus package. Or half a broadband network’s worth.
As for the projected liability of $148 billion, well, it would be nice if it was as little as that. If we take the growth in the liability over the last four years it works out as roughly a 5.5% increase per annum in liabilities each year.
And if we stretch that over the next eleven years, the actual liability would increase to $195 billion, or nearly twice the current liability.
So how does that fit in with the Future Funds targeted investment returns? The Future Fund is targeting a return of 5% over the inflation rate. Based on the current inflation rate, returns will need to be about 8% per annum.
That’s going to leave the Fund a long way short. With that rate of return the real value will still only be $99 billion. That leaves the liability in eleven years nearly as big as it is today.
So by 2020 the federal public sector will have an unfunded liability of at least $99 billion. That’s on top of whatever private sector defined benefit schemes have racked up. By then you’ll be looking at a total liability of close to $150 billion.
Even worse for the Future Fund is that the balance in the fund is supposed to match the liabilities. But in order to do that the Fund will need to achieve an average annual return of 12% over the rate of inflation.
To illustrate how hard that is, look no further than the ASIC website which lists average returns over 5 and 10 year periods. Up to June 2008, the best return for 10 years was 7.6% per annum from a Growth portfolio.
Factor in inflation and the average annual return is more like 4-5%.
In the meantime, individuals will have continued to have 9% of their annual salary funneled into private defined contribution superannuation schemes. But the question won’t be whether publicly funded defined benefit schemes are sustainable, rather it will be whether privately funded pensions will continue in their current form.
With asset prices low and uncertainty high, it represents a perfect opportunity for government to encourage individuals to forgo their defined contribution scheme in return for a new and improved government funded public pension scheme.
Naturally any such scheme would only serve to increase government liabilities, but it would serve the agenda of the public sector taking a greater role in the lives of individuals and provide an immediate near-term funding boost as private assets are handed over to the public purse… doubtless to be spent on infrastructure projects to ‘create’ jobs.
Sound far-fetched? Much of what’s happened during the last six months would have sounded far-fetched two years ago too.
We’ll have more to write on the Great Super Rip-Off over the next week or so.