The other day I was updating my latest iOS on my iPhone. As customary, there is about a 12 page “disclosure” which I must click that I’ve read before the update can be completed. Like many others, I clicked without nothing to read what I just agreed to have read.
My wife jokingly mentioned how I may have just agreed to hand over my new ute to Apple and I’d be neither one the wiser nor in a legal position to challenge them. We chuckled, until there was a knock on the door.
I pose this as I’m sure that I’m not the only schmuck who’s done this. I’m entering into this agreement knowingly that information is asymmetrical, favouring Apple. I know I’m taking a risk, but assume that in the end the law would be on my side, and that the provider won’t take advantage of my naivety.
But putting aside my own laziness, there are two industries where information will always favour the provider: medical and financial. In both these cases, each provider has primal instincts working in their favour: fear and greed. When we feel anxious, we err on the side of expediency over diligence. And sadly, in both these industries, there has been some unscrupulous commercial practices taking advantage of such information asymmetry.
So now that the pundits are done dissecting and pontificating the ramifications from the Hayne Royal Commission, it is worth noting once again that this is neither the first – nor the last – which addresses levelling the information symmetry between provider and principal.
In fact, I’d dare to suggest that in my working lifetime, there will likely be two more yet to come. And while there are some significant recommendations from this Royal Commission, my cynicism on more forthcoming relate to the inherent nature to game away advantages in all industries, particularly those where financial and remuneration metrics favour such tactics.
In a previous piece, I posed why I feared that, in much of the developed world, structural inflation would cease to be problematic, and why standard monetary policy levers would be less effectual in moving the inflation barometer.
Bringing together some powerful thoughts from other acclaimed authors, it is conceivable that three structural drivers would keep structural inflation within anaemic parameters – Demographics, Deficits, and Democracy/Populism (aka “The Three Ds”). To properly immunise retirement savings, however, we need some inflation risk so as to access a cost of capital and nominal government bond yields above CPI.
And in an environment where an increasing number of Australians are moving into retirement phase, and with a significant number of super funds already in member-outflow, how can we properly immunise a portfolio while agency metrics (e.g. peer rankings) prove more vital in sustaining the business/practice over one which constructs portfolios that properly immunise pension liabilities? It’s impossible to achieve a sustainable model that immunises both peer and inflation risks.
The truth is no Royal Commission will address this inherent unstable environment, as more often than not, such an exercise is reactive over one which is a proactive one. As long as the Royal Commission is in response to any inherent malpractice, one should not place too much hope that proper steps to developing a sustainable model will soon follow.
For example, if the 1980s Paul Keating were to address the fiscal ramifications of an ageing populace today, and with an existing allocation of A$3+ trillion, would he and other policy makers construct a superannuation market as we see it today?
If not, then that is where any forthcoming Commission recommendation should be working towards. Until such a time, therefore, any findings herein are a welcomed “band aid” to a recurring problem.
We live in a world where superannuation has morphed into a wealth management business (over one immunising future liabilities), where capital markets are more uncertain given the current negative real cost of capital, and where even the government’s latest productivity report suggests super funds themselves game short term returns so as to achieve favourable peer rankings.
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14 February, 2019