Do we love shares too much?

Mateship, a fair go and the sharemarket. Thanks to compulsory super and a wave of privatisations in the 1990s we have become a nation of “mum and dad” shareholders.

Australians have 54 per cent of their retirement savings in equities. That’s the highest exposure among the 13 countries with the largest national pension pools, as identified by Towers Watson. The US has the next largest allocation at 52 per cent of total pension assets. In the Netherlands it’s 27 per cent, in the UK 45 per cent, and Canada 43 per cent.

The market crash of 2008 prompted an army of wise heads, led by former treasury secretary Ken Henry, to bemoan what they saw as an overly risky approach to saving for retirement, particularly in the so-called “balanced” default options – although not much has been heard on the topic since the market rally.

More than meets the eye

Now, a report by Towers Watson suggests our love of equities is more than just a reflection of the “she’ll be right” attitude of a nation of punters.

The report points out that 81 per cent of our pension assets are in defined contribution (DC), or accumulation-style funds, with the remaining 19 per cent in defined benefit (DB) funds. By contrast, the average proportion of DC assets in the top 13 countries is only 45 per cent.

Accumulation funds are based on how much you contribute over your working life and the earnings you generate on those contributions. DB funds, on the other hand, rely on a mathematical formula to predict how much members need to contribute annually in order to receive a fixed proportion of their final salaries in each year of retirement.

Different priorities

“The Australian dominance of DC enables trustees to place priority on long-term risk-adjusted returns, whereas in countries with a greater bias to DB, matching liabilities is a greater priority, leading to lower equity and higher bond allocations, despite the historically low bond yields currently on offer,” writes Martin Goss, a senior investment consultant at Towers Watson in Australia.

That is, when you are trying to build as big a pot as possible for retirement, you go for returns. When you’re trying to juggle your future promises (liabilities) with the money you have now, then minimising the risk of getting your forecasts wrong is top priority.

In that context, our love affair with shares rationally reflects our country’s super structure rather than our national character.

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