The global financial crisis has been a game changer for the superannuation industry as disenchanted investors flee mainstream funds in record numbers to start their own self managed super funds. But it’s not just investors who have learned important lessons from this crisis of confidence.
The big super funds have also begun to rethink their one-size-fits-all approach to default options in order to retain members. They have improved their investment menus with the addition of pre-mixed and single strategy options, the introduction of direct investment in shares and term deposits and age-based defaults that progressively reduce exposure to high risk growth assets as members get older.
Super contributions are invested in a fund’s default option when members don’t select an alternative. After 20 years of compulsory super and more recent product innovation, the vast majority of fund members – more than 80 per cent in some cases – are still in the balanced default option.
While it is generally assumed that people in the default option are disengaged with their super, it is possible that some see the default as an implied recommendation by their fund or employer while others may decide that the default is actually the right asset mix for them.
For all these reasons, super funds take their default option very seriously. If they fail to deliver, members will lose faith in the system.
A question of balance
To a degree, this has already happened. The big funds all went into the crisis with default options labelled as ‘balanced’ that were in fact top heavy with shares and other listed assets. The average balanced default option has up to 60 per cent growth assets and the rest in conservative cash and fixed interest, but some funds have up to 75 per cent of members’ money in growth assets.
According to figures from fund monitor, Chant West in the five years to June 2012 the average balanced option returned 1.6 per cent a year after tax and fees, not enough to outpace inflation.
After suffering heavy losses in 2008 and 2009, many investors decided they could do better than the professionals and started their own Self Managed Super Funds. Many of these self-directed investors have gone on to do very well simply by keeping a high proportion of their funds in cash and term deposits.
Over the past five years cash returned 5.3 per cent a year, Australian bonds returned 8.2 per cent and hedged international bonds 9.6 per cent. By comparison, Australian shares lost 4.2 per cent a year over the same period while Australian listed property (REITs) lost 12.6 per cent a year.
Going the distance
At the height of the GFC the nation’s biggest super fund, Australian Superannuation undertook a review of its balanced default option with a view to replacing it with an age-based default with surprising results. In what Yes Minister’s Sir Humphrey Apple by would call ‘a brave decision’ the fund decided to retain the balanced default option with around 75 per cent of its investments in growth assets.
Braver still, it made the balanced option the default for its pension product until members reach age 75 when growth assets are scaled back to 50 per cent. The reasoning was that the finish line for retirement savings is death, not retirement, and most of us will need to keep some exposure to growth assets during the early years of retirement in order to ensure our savings last the distance.
That’s a message to keep in mind no matter which type of super fund you choose. While cash and term deposits have provided certainty in uncertain times, they will not protect against the ravages of inflation or provide the capital growth necessary to fund a long and comfortable retirement.
Super choice, flexibility and control have the potential to deliver superior investment returns as long as investors remember they are running a marathon, not a sprint.
The big super funds have also begun to rethink their one-size-fits-all approach to default options in order to retain members. They have improved their investment menus with the addition of pre-mixed and single strategy options, the introduction of direct investment in shares and term deposits and age-based defaults that progressively reduce exposure to high risk growth assets as members get older.
Super contributions are invested in a fund’s default option when members don’t select an alternative. After 20 years of compulsory super and more recent product innovation, the vast majority of fund members – more than 80 per cent in some cases – are still in the balanced default option.
While it is generally assumed that people in the default option are disengaged with their super, it is possible that some see the default as an implied recommendation by their fund or employer while others may decide that the default is actually the right asset mix for them.
For all these reasons, super funds take their default option very seriously. If they fail to deliver, members will lose faith in the system.
A question of balance
To a degree, this has already happened. The big funds all went into the crisis with default options labelled as ‘balanced’ that were in fact top heavy with shares and other listed assets. The average balanced default option has up to 60 per cent growth assets and the rest in conservative cash and fixed interest, but some funds have up to 75 per cent of members’ money in growth assets.
According to figures from fund monitor, Chant West in the five years to June 2012 the average balanced option returned 1.6 per cent a year after tax and fees, not enough to outpace inflation.
After suffering heavy losses in 2008 and 2009, many investors decided they could do better than the professionals and started their own Self Managed Super Funds. Many of these self-directed investors have gone on to do very well simply by keeping a high proportion of their funds in cash and term deposits.
Over the past five years cash returned 5.3 per cent a year, Australian bonds returned 8.2 per cent and hedged international bonds 9.6 per cent. By comparison, Australian shares lost 4.2 per cent a year over the same period while Australian listed property (REITs) lost 12.6 per cent a year.
Going the distance
At the height of the GFC the nation’s biggest super fund, Australian Superannuation undertook a review of its balanced default option with a view to replacing it with an age-based default with surprising results. In what Yes Minister’s Sir Humphrey Apple by would call ‘a brave decision’ the fund decided to retain the balanced default option with around 75 per cent of its investments in growth assets.
Braver still, it made the balanced option the default for its pension product until members reach age 75 when growth assets are scaled back to 50 per cent. The reasoning was that the finish line for retirement savings is death, not retirement, and most of us will need to keep some exposure to growth assets during the early years of retirement in order to ensure our savings last the distance.
That’s a message to keep in mind no matter which type of super fund you choose. While cash and term deposits have provided certainty in uncertain times, they will not protect against the ravages of inflation or provide the capital growth necessary to fund a long and comfortable retirement.
Super choice, flexibility and control have the potential to deliver superior investment returns as long as investors remember they are running a marathon, not a sprint.
Author:
Barbara Drury
Barbara Drury is a freelance financial journalist who writes for the Sydney Morning Herald and The Age as well as finance industry magazines, newsletters and has authored a number of books. To contact Barbara, email uw@donnellywealth.com.
Source: http://unconventional-wisdom.com.au/personal-finance/superannuation/investing-by-default
Barbara Drury is a freelance financial journalist who writes for the Sydney Morning Herald and The Age as well as finance industry magazines, newsletters and has authored a number of books. To contact Barbara, email uw@donnellywealth.com.
Source: http://unconventional-wisdom.com.au/personal-finance/superannuation/investing-by-default
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