The Government is getting most things right. But no one is perfect in the face of a crisis.

For some of the most vulnerable people in society the Government’s message is effectively saying, “Use your own super to tide yourselves over and by the way, you’ll need to take it out at a massive loss, which you can never recoup.” As Chairman of SuperRatings, Jeff Bresnahan says, “There must be a better way.”

Under the current proposal, tens of billions of dollars of assets could need to be dumped into declining markets, meaning that some Australians seeking their $10,000 “tax free” super payment in mid-April, could inadvertently get as little as 70 cents in the dollar against what they would have got just two months ago.

Nearly all of the problems will arise because the eligibility criteria to access your super are way too generous. As Bresnahan says: “This shotgun approach has the potential to come back and bite the Government, hard. The focus absolutely needs to be on those who truly do need access to cash, and fast. Quite simply, those displaced from their jobs due to this horrific COVID-19 virus. In reality, those in hardship. This shouldn’t be a self-assessment process for all Australians”.

SuperRatings also encourages the Government to rethink just how they can get that money to those in need, whilst protecting their retirement nest eggs. Any of the following three options, or preferably a combination thereof, has the potential to protect our most vulnerable as well as retaining their superannuation balances:

  1. Allow funds to take a loan out from the RBA, to meet all claims. This loan would be secured against members’ benefits and repayable after say 5 years. This would then allow members to recoup lost investment earnings. The Government is protected, the member gets emergency funding, and the funds don’t have to dump assets into a declining market.
  2. A variation on (1) but with the ATO handling all claims, making all payments and retaining the loan register. This is a cleaner payment portal and still protects the Government, the member and the fund.
  3. Protect funds against having to sell into declining markets by ensuring that payments are only made to those in genuine hardship (e.g. those who have registered as unemployed, have been stood down, etc. and remain so after 4 weeks). At present, on a self-assessment basis, virtually all Australians, employed or not, could potentially make a claim.

SuperRatings believes the above provides a win/win scenario versus the upcoming lose/lose that Australia’s most vulnerable and those in, or near, retirement are going to cop. By winding back the eligibility criteria, the level of claims will be lower and hence more manageable. This in turn creates more flexibility for the Government on how to best work with the funds to ensure those in need receive assistance as quickly as possible.

Opening the floodgates to allow virtually anyone and everyone to drag up to $20,000 out of their super fund, with the current market volatility, is not the answer. All this after bipartisan governments have spent over 27 years – and half a working lifetime –getting Australians’ retirement savings into shape. As Bresnahan says “These are extraordinary times, but let’s make sure aid reaches those who need it, not everyone who asks”.

Compounding the issue is the loss of future benefits. $20,000 out of a 35 years old’s super account over the next twelve months foregoes around $80,000 in future benefits. As the graph shows, this affects everyone who withdraws money from super.

Impact of super withdrawals on future balances

Assumptions: based on ASIC’s MoneySmart calculator using a Growth option with an assumed investment return of 5.0% before fees and taxes on earnings.

The current potential for rorting the system is significant. If, as a result of unnecessary claiming, some funds are forced to consider freezing withdrawals to protect their remaining members, what will the Government do then? This is not new. Every financial crisis has resulted in a small number of investment funds being frozen, although this might be a first for super funds.

Bresnahan concluded: “The Government has less than three weeks to tweak what is a valid and morally sound strategy to protect, as best they can, the financial stability of those who have been displaced due to COVID-19 consequences. The idea is sound – the execution not the greatest.”

So, with some quick and effective decisions, SuperRatings believes the Government can protect those in most need, by providing emergency funding; whilst simultaneously retaining many Australians’ super for their retirement; and ultimately maintaining the integrity and confidence of the superannuation system overall

According to estimates from leading research house SuperRatings, super funds had a positive start to 2020, with the median balanced option returning 1.9% in January, driven predominately by gains from Australian and International shares.

The start of February was a different story as markets were affected by the outbreak of the Coronavirus, which led to a selloff in global share markets as investors sought out safe-haven assets.

Asian equity markets have borne the brunt of the initial impact, but the effects are likely to be felt across global markets, noting that previous outbreaks over the last two decades have resulted in short–term equity market corrections within a range of 5–15%.

As super funds face the new normal of lower returns and yields, managing volatility is becoming increasingly necessary. However, despite the current swings in the market, SuperRatings said funds remained focused on long-term member outcomes.

“The funds we’ve spoken to are not responding to the current market situation with knee-jerk reactions,” said SuperRatings Executive Director Kirby Rappell.

“They’re watching developments closely, but so far market volatility has been in line with similar risk events experienced in recent years. Fund investment strategies are generally well placed to manage these types of movements.”

Looking back at previous epidemics, such as the Ebola outbreak in 2018 or the SARS epidemic back in 2003, Australian super funds have proved relatively resilient to short-term market movements. Quarterly returns during each episode have ranged between -2.1% and +4.3%, with markets largely unfazed over longer periods.

Outbreaks and SR50 Balanced Index performance


Source: SuperRatings, Financial Express

Whether the effect of the Coronavirus has a more lasting impact on markets remains to be seen, but funds are unlikely to implement any dramatic changes to their investment strategies without further evidence that the virus will deal more prolonged damage to the global economy.

Con Michalakis, Chief Investment Officer at StateWide Super, said that while there would undoubtedly be some economic fallout, the fund remains focused on long-term member outcomes. “This is a classic case of a black swan, and like all black swans the markets struggle with uncertainty,” said Mr Michalakis.

“What we can be sure about is that the economy in China and Australia will be slower due to the restrictions in place in the first quarter of 2020. However, from a long-term perspective, diversification and strategy based on member age and risk tolerance is more important.”

Suzanne Branton, Chief Investment Officer at CareSuper, said the fund’s investment strategies are designed to provide downside protection during bouts of market turmoil.

“When new influences on the investment outlook emerge, it’s important to analyse and monitor these closely,” said Ms Branton.

“There could be a short-term impact that provides investment opportunities or avenues to adjust positioning. However, there are reasons to expect a more short-term rather than extended large-scale market impact. Our investment approach is structured to deliver downside protection so our investment program resilience to short-term volatility is high.”

Super funds post solid returns in January as share markets powered into 2020

Super funds started the year in positive territory as momentum in local and international share markets carried through into the new year. This was quickly reversed following the outbreak of the Coronavirus and the ensuing drawdown in markets, but over longer periods super fund returns are holding up remarkably well.

Over 12 months to the end of January, the median balanced option returned an estimated 13.8%, while the median growth option return was estimated at an impressive 16.2%. Returns over the past seven years are estimated at 8.8% and 9.8% respectively.

Estimated accumulation returns (% p.a. to end of January 2020)

  1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index 16.2% 10.2% 8.2% 9.8% 8.8%
SR50 Balanced (60-76) Index 13.8% 9.1% 7.7% 8.8% 8.2%
SR50 Capital Stable (20-40) Index 7.7% 5.3% 4.6% 5.3% 5.6%

Source: SuperRatings

Pensions have delivered even higher returns than accumulation products, with the median balanced pension option returning an estimated 15.4% over the 12 months to the end of January, while the median growth pension option had an estimated return of 18.0%. Over the past seven years each have returned 9.6% and 10.8% respectively.

Estimated pension returns (% p.a. to end of January 2020)

  1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index 18.0% 11.4% 9.3% 10.8% 9.7%
SRP50 Balanced (60-76) Index 15.4% 9.8% 8.1% 9.6% 9.0%
SRP50 Capital Stable (20-40) Index 8.9% 6.2% 5.2% 5.9% 6.3%

Source: SuperRatings

“We expect to see volatility appear more frequently over the course of 2020, but overall our outlook for super funds is positive,” said Mr Rappell.

“Long-term returns will continue to hold up despite the challenging return environment we find ourselves in at present. Members should look forward to a solid 2020, but expect some bumpiness along the way.”

Super members have every reason to be optimistic about 2020, but when it comes to a repeat of 2019’s double-digit returns, it would be wise to temper expectations.

According to estimates from leading research house SuperRatings, 2019 was the best year for superannuation funds since 2013, with the median balanced option returning 13.8%. Despite a selloff in Australian shares in December, funds entered the new year in a strong position as markets shrugged off a string of negative economic news and rising geopolitical tension.

However, funds are already battling the new normal of lower yields and returns, which will make a repeat of 2019’s results unlikely in 2020.

Looking back over 2019, the median balanced accumulation option returned 13.8% over the year to the end of December and has returned 7.7% p.a. over the past decade. December saw an estimated fall of 0.9%, ending an otherwise stellar year for Australian shares, on a sour note. Markets were driven predominately by the health care and materials sectors, while the financial services sector, despite delivering a positive result, remains largely beaten down, thanks mostly to the major banks.

The median growth option returned an estimated -1.1% in December and 16.0% over the year, while the capital stable option returned an estimated -1.0% and 7.0% respectively.

Estimated accumulation returns (% p.a. to end of December 2019)

  1 mth 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index -1.1% 16.0% 9.0% 8.2% 10.0% 8.2%
SR50 Balanced (60-76) Index -0.9% 13.8% 8.1% 7.4% 8.8% 7.7%
SR50 Capital Stable (20-40) Index -1.0% 7.0% 4.7% 4.5% 5.2% 5.4%

Source: SuperRatings

Pensions performed similarly well in 2019, with the median balanced option returning an estimated 14.9% over 2019, compared to 18.2% for the growth option and 8.0% for the capital stable option.

Estimated pension returns (% p.a. to end of December 2019)

  1 mth 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index -1.2% 18.2% 9.9% 9.3% 11.1% 9.1%
SRP50 Balanced (60-76) Index -1.0% 14.9% 8.8% 8.0% 9.7% 8.5%
SRP50 Capital Stable (20-40) Index -1.0% 8.0% 5.4% 5.2% 5.8% 6.1%

Source: SuperRatings

“We’re anticipating a solid year for super in 2020, but the key challenge for funds will be the low return environment,” said SuperRatings Executive Director Kirby Rappell.

“Even with the possibility of a pickup in economic growth, yields are extremely low and it’s getting harder to find opportunities in the market. Company earnings growth is slowing, and Australian consumers are under pressure, so fundamentally it will be more challenging than 2019. That doesn’t mean it will be a bad year, but super members should not expect to bank another 13 per cent.”

Super’s long-term growth story still a winner

As the chart below shows, 2019’s double-digit return compares favourably to recent years and is significantly higher than the average return (6.4% over the past 20 years). Based on SuperRatings’ estimate of 13.8%, 2019 would represent the highest return since 2013 and the fourth-highest over the past two decades.

Median balanced option calendar year returns 2000-2019

* Estimate

Source: SuperRatings

Following the volatility of 2018, super funds saw steady growth over 2019 with only three down months during the year, with the largest fall in the median balanced option estimated to be -0.9% in December.

The main drivers of performance typically come from equities, of which Australian shares generally make up the greatest proportion. As the chart below shows, the Australian share market delivered a return of 18.4%, while international shares delivered 25.4% (unhedged) and 25.8% (40% hedged in Australian dollars). Meanwhile, listed property returned 14.2%, fixed interest – another major asset class for funds – returned 4.4%, and cash returned 1.5%. Another important asset class is Alternatives (including private equity), although market-based measures of performance are harder to determine as they are offered within diversified portfolios rather than standalone options.

Asset class returns in 2019

Returns based on the following indices: S&P/ASX 200 Index, MSCI World ex-Australia Index (USD), S&P/ASX 300 A-REIT Index (Industry), Vanguard Australian Fixed Interest Index ETF, Bloomberg AusBond Bank Bill Index (AUD). Hedging based on AUD/USD exchange rate of 0.7058.

Since the GFC, funds have ridden market turbulence through 2011, 2015 and 2018 to build significant wealth for members. Looking back over the past 15 years to 2005 (before the GFC hit), the median balanced option with a starting balance of $100,000 would have grown to an estimated $259,340 by the end of 2019 (a return of 159.3%). Similarly, the median growth fund would have risen to an estimated $264,208 (a return of 164.2%).

Growth in $100,000 invested over 15 years to 31 December 2019

Source: SuperRatings

Expect further fund consolidation in 2020

Over the course of 2019 there was a number of high-profile mergers, and 2020 is expected to see more funds come together to achieve greater scale. Mergers have typically been based on geographic proximity, similar industry sectors and strategic fits, with funds seeking merger partners that are strong in areas in which they may be weaker.

A key driver of mergers will be the sustainability of operating expenses, which as the chart below shows, is a challenge for some funds across all size categories. Though, smaller funds are more likely to have a high cost per member (CPM) and management expense ratio (MER), which measure the operational costs of the fund relative to its size.

Sustainability of cost structures

Source: SuperRatings

“With the increased regulatory scrutiny on the sector, funds are focused on the challenge of increasing scale and driving down fees,” said Mr Rappell. “It’s pleasing to see that there’s a clear focus among providers on their plans to adapt to the changing landscape, which should support continued uplift in member outcomes.”

However, there remains a number of providers who are struggling to deliver sufficient value for money and the industry’s ability to address this is critical. APRA released its MySuper Heatmaps in December 2019 which highlight laggards based on investment returns, fees and sustainability metrics and has emphasised a tougher approach going forward. APRA also now has stronger powers to force underperforming funds to merge, which is likely to further drive consolidation across the industry.

Release ends

We welcome media enquiries regarding our research or information held in our database. We are also able to provide commentary and customised tables or charts for your use.

For more information contact:

Kirby Rappell
Executive Director
Tel: 1300 826 395
Mob: +61 408 250 725
Kirby.Rappell@superratings.com.au

On the back of the 2019 KiwiSaver product ratings, SuperRatings is pleased to provide a list of the top 10 providers on a Net Benefit basis across Conservative, Balanced and Growth funds. The Net Benefit figures have been calculated using investment returns minus fees and taxes for the 7 years to 31 March 2019. This represents the dollar amount credited to a member’s account and is the best approach to assessing the value that a scheme delivers to its members.

We note that the Financial Market Authority’s 2019 KiwiSaver Annual Report indicated a shift in their focus from pure fees towards value for money. SuperRatings welcomes this change and will continue to monitor progress in this area to emphasise the importance of this approach, drawing on our experiences across both the New Zealand and Australian markets.

“Despite a volatile financial year, the median performance for Conservative and Balanced funds improved over the 12 months to 31 March 2019,” said SuperRatings Executive Director Kirby Rappell. “Schemes had to navigate through increased volatility and geopolitical risks, particularly in the final quarter of the 2018 calendar year. Stronger equity markets in the following quarter helped recover losses, though the median 1 year return for Growth funds moderated slightly given the higher allocation to domestic and international shares”.

The median member fee remained at $30, while we observed a slight decrease in the total percentage-based fees for Balanced and Growth funds, though they continue to charge more than the median Conservative fund. “Net Benefit cuts through the issue of having to look at returns and fees separately. Our analysis shows that despite higher fees, Net Benefit outcomes for Growth funds continue to sit above Balanced and Conservative funds”.

Another insight is the relatively narrow range of outcomes being delivered for members investing in Conservative funds. Over 7 years, the difference between the best and worst Net Benefit provider was around $3,500, yet this represents almost 20% of the member’s starting balance. This compares to a difference of over $30,000 in the Australian market, driven by stronger investment earnings and higher contribution rates. “For KiwiSaver members, changing fund type rather than changing provider can have a bigger impact on their retirement savings,” said Rappell. “SuperRatings remains supportive of schemes providing education, advice as well as digital tools to empower members to make an active choice regarding their fund type. Whilst default funds may be appropriate for first home buyers and those nearing retirement, members using KiwiSaver as a long-term savings vehicle should be informed on the options available to them”.

SuperRatings’ Net Benefit methodology models investment returns achieved by each scheme over a seven-year period to 31 March 2019, as well as the fees charged over the period. The analysis uses a scenario of a member that has a salary of $50,000 and a starting balance of $20,000. It then assumes a contribution rate of 3.0% with a contribution tax of 17.5%.

*Net Benefit outcomes are calculated over seven years and assume a contribution rate of 3.00%, contribution tax of 17.50%, salary of $50,000 p.a. and a starting balance of $20,000.
**Russell LifePoints® Conservative Fund.
***Russell LifePoints® Balanced Fund.
****Russell LifePoints® Growth Fund.

The question no-one wants to ask is – Why are APRA collecting, interpreting and then publishing information in the public domain? The answer is simple – They shouldn’t be!

Instead of regulating, APRA are now trying to play the shame game through their just released heatmaps. But there is a real risk that some of those shamed will be the wrong funds. As the founder of SuperRatings, Jeff Bresnahan says, “The problem is that no one in the industry wants to tell the regulator that they have got it wrong.”

Effectively, APRA is putting into circulation data which analyses just parts of a super fund, not the whole. By ignoring things like Governance, Advice, Insurance and Member servicing structures, consumers are not being provided with the whole picture.

As Bresnahan says, “While conflicts of interest were identified as a major issue in superannuation during the Royal Commission, it seems ironic that APRA has deliberately avoided reporting any measurement of a Fund’s Governance structure”.

In an industry which carries inherently conflicted Directors, it would appear that Governance is ignored in favour of more easily assessable information. Whether such omissions create any legal liabilities for APRA in the future remains debatable.

As a result, APRA continues its foray into unchartered territory. This is not the first time APRA have got it wrong. They have been producing performance tables for over a decade. Unfortunately, the performance tables were flawed from a usefulness perspective, in that they don’t reflect the performance of a super fund’s investment options. However, they continue to produce them and in doing so confuse and possibly mislead Australians.

And so it continues with the heatmaps. Having reviewed the heatmap methodology, SuperRatings is of the opinion that their release into the public domain may create more questions than they answer and that consumers could well be influenced into products that are inappropriate for them.

Aside from the bigger question of why APRA is publishing such data, there remain a number of problems with the methodology adopted. Critically, APRA appears to ignore implicit asset fees when measuring net investment performance.  As Bresnahan says, “This methodology can easily overstate the net benefit a member receives. Similarly, a low-cost investment option with high administration fees creates the very real possibility of consumers investing monies in cheap investment options that have no chance of outperforming the relevant index over any time period, whilst getting slugged high administration fees.”

Investment analysis since the onset of the Superannuation Guarantee in 1992 has shown that all implicit fees and performance must be analysed together on an actual net of fees basis. Many leading funds, in terms of balanced option performance, have had higher allocations than the average fund to traditionally more expensive asset classes such as infrastructure, private equity and unlisted property. These asset classes have continually outperformed cheaper alternatives.

It’s only when all actual fees and returns are combined that the range of results is clearly evident in dollar terms, as the following graph indicates. The graph shows the disparity of net earnings on a $50,000 starting balance (and $50,000 salary) with SGC contributions mapped over both the last 3 and 10 years. Notably, many of the funds that added the most value, over both the short and long term, invested into the more expensive asset classes. Driving people into low-cost options will come at the expense of future earnings, something that taxpayers will ultimately have to bear.

Net benefit trend analysis (over 3 and 10 years)

Source: SuperRatings

And the anomalies continue. The heatmaps are judging funds on short term performance over just 3 and 5 years. Whilst it will be claimed this is necessary due to the limited performance history of MySuper products, it should be noted that most funds have been around for over 25 years and that their default option provides an accurate MySuper proxy.

As Bresnahan said, “Given super is a key plank of Australia’s economic future, it seems counter-intuitive for the Government’s regulator to not measure funds over a more realistic period. Certainly, it is commonly accepted that 7, 10 and 15 year performance analysis is best practice given the long term (60 years plus) nature of superannuation membership.”

Again, a consumer moving funds due to seeing a 3-year performance gap, mid-way through an economic cycle, will no doubt be moving for the wrong reasons.

The way forward

Bresnahan says, “Australians are not stupid, but they remain frustratingly unengaged with their superannuation.” This problem remains the real challenge for much of the industry. APRA’s endeavours are admirable, but questionable at the same time. He goes on to say, “A regulator should set the structure under which funds need to operate. The morphing of this regulatory process into public comparisons leaves it open to being seen as stepping across the line. One wonders what they are actually trying to achieve by moving into this public domain.”

If APRA must continue down this path, then SuperRatings suggests that they need to concentrate on the whole picture, rather than isolated parts therein. This should, aside from earlier mentioned issues, also include:

  1. Regulations to enable consistent fee disclosures, including the inequitable use of tax deductions and transparency to members;
  2. The disclosure of risk within portfolios, both via the assumptions within their growth/defensive disclosures and accepted risk measures;
  3. Compulsory disclosure of major asset holdings;
  4. Moving members into go-forward products and removing legacy structures;
  5. Continued rationalisation of member accounts; and
  6. Increased focus on the decumulation phase and the optimisation of the alignment with retiree objectives.

Identifying poorly run funds is not difficult and APRA would be well aware of them. A series of simple measures such as the non-public fee analysis shown below, when combined with other key assessments, quickly shows those funds who have spent the past few decades masking conflicts of interest at the expense of members.

When it costs a fund over $1,200 to run every account (versus a median of $300) or a fund’s operating expenses as a percentage of assets are over two and a half times the median, then those funds bear further scrutiny. Similar work can be done across Investments, Governance, Administration and Insurance, to name a few. By putting together the whole picture, the poor funds are very quickly exposed.

Operating expenses versus size and members

Source: SuperRatings

But it’s not all gloom and doom for the process. Importantly, after 14 years of industry debate, APRA has finally made a call on what constitutes a growth asset and what constitutes a defensive asset. The growth/defensive debate remains loud within the industry but with APRA’s call of Australian Unlisted Property and Australian Unlisted Infrastructure being 25% defensive, at least there is a starting point. SuperRatings suspect this will not however be the final position.

Certainly, APRA’s front foot involvement with data will give cause for reflection for all super funds, as the funds review their results and assess whether it has any implications for their future.

SuperRatings continues to watch the evolution of the market and continues to monitor funds on their effectiveness in responding to key challenges. We look forward to seeing whether the heatmaps evolve over time and remain broadly supportive of APRA’s underlying intentions. However, we underline that this remains only part of the picture and that the risk of making providers look alike is real. In an environment where innovation is needed, regulatory settings to support innovation are vital to ensure a vibrant industry that thrives into the future resulting in better outcomes for members.

Release ends

We welcome media enquiries regarding our research or information held in our database. We are also able to provide commentary and customised tables or charts for your use.
For more information contact:

Jeff Bresnahan
Founder & Chairman
Tel: 1300 826 395
Jeff.Bresnahan@superratings.com.au

Kirby Rappell
Executive Director
Tel: 1300 826 395
Kirby.Rappell@superratings.com.au

Super funds are off to a positive start in the December quarter, regaining momentum following a rocky September and paving the way for double-digit returns for the 2019 calendar year.

While markets have come under pressure in recent months, super funds have once again proved they are up to the task of navigating the significant uncertainty in markets, geopolitics, and the global economy.

Super fund returns held up well in October, despite weakness from Australian shares and signs of softer economic growth globally. The major financials sector has come under pressure due to constrained lending, lower net interest margins, and continued fallout from the Royal Commission. IT shares also suffered a dip as investors questioned the lofty valuations of Australia’s local tech darlings.

According to SuperRatings’ estimates, the median balanced option returned a modest 0.3% in October, but the year-to-date return for 2019 is sitting at a very healthy 12.5%. The median growth option has fared even better, returning 14.4%, while the median capital stable option has delivered a respectable 7.1% to the end of October.

Over the past five years, the median balanced option has returned an estimated 7.6% p.a., compared to 8.3% p.a. from growth and 4.7% p.a. from capital stable (see table below).

Estimated accumulation returns (% p.a. to end of October 2019)

  YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index 14.4% 11.9% 10.1% 8.3% 10.1% 8.5%
SR50 Balanced (60-76) Index 12.5% 10.5% 8.9% 7.6% 9.1% 7.9%
SR50 Capital Stable (20-40) Index 7.1% 6.8% 5.0% 4.7% 5.3% 5.6%

Source: SuperRatings

Estimated pension returns (% p.a. to end of October 2019)

  YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index 16.4% 13.3% 11.2% 9.4% 11.4% 9.5%
SRP50 Balanced (60-76) Index 13.8% 11.7% 9.8% 8.3% 9.9% 8.7%
SRP50 Capital Stable (20-40) Index 8.3% 7.7% 5.9% 5.5% 6.0% 6.4%

Source: SuperRatings

“This year has provided further solid evidence of the ability of super funds to deliver for their members through a challenging market environment,” said SuperRatings Executive Director Kirby Rappell.

“Whether it’s the US-China trade conflict, the weaker economic outlook, falling interest rates, or the rolling Brexit saga, there’s been a lot for funds to take in. This has been a real test of their discipline and ability to manage risks on the downside. Growing wealth in this environment while protecting members’ capital is a tall order, but they have managed it well.”

Shifting asset allocation key to managing risk

One of the most important trends in the superannuation industry is the broadening of members’ investments across different asset classes. Over the past five years, super funds have shifted away from Australian shares and fixed income and moved a higher proportion of funds into international shares and alternatives (see chart below).

Change in asset allocation (2009 to 2019)

Super fund asset allocations have shifted towards alternatives

Source: SuperRatings

The shift to alternatives is significant and has been the subject of debate within the industry. Alternatives include private market assets and hedge funds, which despite the negative connotations can provide an important source of diversification and downside protection when markets take a turn for the worse.

These assets tend to be less liquid, but they can play an important role for funds looking to generate income while managing risks for their members in a world characterised by low yields and growing uncertainty. However, funds should be clear about their alternatives strategy and the risks they could potentially add to members’ portfolios.

“This shift in asset allocation is in part being driven by the low interest rate environment, which has prompted super funds to reach for yield by allocating to alternatives and other less liquid assets,” said Mr Rappell.

“This isn’t necessarily a bad thing, and it may in fact result in a more robust asset allocation, but it’s something members should be aware of. Alternatives can help protect capital under certain market conditions, but they can also be used to boost returns by taking on some additional risk. We generally think the shift to a broader asset allocation is positive, but funds should not be complacent in ensuring risk is appropriately managed.”

A combination of factors has created fertile ground for market volatility, resulting in a bumpy ride for super members, who have experienced six negative monthly returns over the past year.

According to SuperRatings, the median balanced option return for August was an estimated -0.5%, with the negative result driven by a fall in Australian and international shares. The median growth option, which has a higher exposure to growth assets like shares, fared worse, returning an estimated -0.9%.

In contrast, the median capital stable option, which includes a higher allocation to bonds and other defensive assets, performed more favourably with an estimated return of 0.3% (see table below).

Estimated accumulation returns (% p.a. to end of August 2019)

1 month 1 year 3 years 5 years 7 years 10 years
SR50 Growth (77-90) Index -0.9% 5.2% 8.8% 8.0% 10.2% 8.5%
SR50 Balanced (60-76) Index -0.5% 5.3% 8.0% 7.5% 9.2% 8.0%
SR50 Capital Stable (20-40) Index 0.3% 5.3% 4.8% 4.8% 5.4% 5.7%

Source: SuperRatings

Investors were caught off guard in August as trade negotiations between the US and China broke down, while a range of geopolitical and market risks, including further signs of a slowing global economy, added to uncertainty.

In Australia, a disappointing GDP result for the June quarter revealed a domestic economy in a more fragile state than previously acknowledged. Action from the Reserve Bank to lower interest rates is expected to assist in stabilising markets but could be detrimental for savers and retirees who rely on interest income.

Pension products shared a similar fate in August, with the balanced pension option returning an estimated -0.6% over the month while the growth pension option returned an estimated -1.0% and the capital stable pension option was mostly flat with an estimated return of 0.3%. Long-term returns are still holding up well, with the median balanced option for accumulation members delivering 9.2% p.a. over the past seven years (in excess of the typical CPI + 3.0% target) and the median balanced pension option returning 10.2% p.a.

Estimated pension returns (% p.a. to end of August 2019)

1 month 1 year 3 years 5 years 7 years 10 years
SRP50 Growth (77-90) Index -1.0% 5.9% 9.9% 9.2% 11.5% 9.4%
SRP50 Balanced (60-76) Index -0.6% 6.2% 8.7% 8.0% 10.2% 8.8%
SRP50 Capital Stable (20-40) Index 0.3% 6.2% 5.5% 5.5% 6.3% 6.4%

Source: SuperRatings

“There will always be negative months for super members, but the timing of negative returns can have a real impact on those entering the retirement phase,” said SuperRatings Executive Director Kirby Rappell.

“For members shifting their super savings to a pension product, a number of down months in relatively quick succession will mean they begin drawing down on a smaller pool of savings than they might have anticipated. As members get closer to retirement, it’s important that they review their risk tolerance to make sure they can retire even if the market takes a turn for the worse.”

As the chart below shows, down months in the latter part of 2018 took their toll on pension balances, although they were able to recover through 2019 to finish above their starting value by the end of August 2019.

Pension balance over 12 months to end August 2019*

Pension balance over 12 months to end August 2019
Source: SuperRatings
*Assumes a starting balance of $250,000 at the end of August 2018 and annual 5% drawdown applied monthly.

Comparing balanced and capital stable option performance shows that the balanced option suffered a greater drop but was able to bounce back relatively quickly. A starting balance of $250,000 fell to $232,951 over the four months to December 2018, before recovering to $252,091 at the end of August 2019.

In contrast, the capital stable option was able to better withstand the market fall, with a starting balance of $250,000 dropping to only $241,746 in December before rising back to $252,201.

While both performed similarly over the full 12-month period, a member retiring at December 2018 could have been over $8,500 worse off if they were in a balanced option compared to someone in a capital stable option. While a capital stable option is not expected to perform as well over longer periods, it will provide a smoother ride and may be an appropriate choice for those nearing retirement.

“Super fund returns have generally held up well under challenging conditions, but there’s no doubt this has been a challenging year for those entering retirement,” said Mr Rappell.

“Under these market conditions, timing plays a bigger role in determining your retirement outcome. At the same time interest rates are at record lows and moving lower, so the income generated for retirees and savers is less, particularly if someone is relying on interest from a bank account. In the current low rate and low return environment, it’s harder for retirees to generate capital growth and income.”

Recent market turmoil is a timely reminder to super members not to allow short-term market movements to impact their investment decisions, according to leading research house SuperRatings.

As investors deal with a renewed bout of volatility and growing uncertainty surrounding the economic outlook, recent data show that members are often better off riding the wave rather than switching out of their current investment option in favour of something safer.

After a promising start to the 2020 financial year, markets took a dive through the first half of August, with super funds likely to feel the pinch. According to SuperRatings, the median balanced option return was a promising 1.3% in July, but this has likely been reversed due to August’s fall in share markets. The return for the median growth option, with two thirds of the portfolio allocated to local and international shares, was 1.6% over the year, while the cash option returned 0.1%.

Median Balanced option returns to 31 July 2019

 Period Accumulation returns Pension returns
 Month of July 2019 1.3% 1.5%
 Financial year return to 31 July 2019 1.3% 1.5%
 Rolling 1-year return to 31 July 2019 7.2% 8.2%
 Rolling 3-year return to 31 July 2019 8.4% 9.0%
 Rolling 5-year return to 31 July 2019 7.8% 8.4%
 Rolling 7-year return to 31 July 2019 9.5% 10.6%
 Rolling 10-year return to 31 July 2019 8.3% 9.3%
 Rolling 15-year return to 31 July 2019 7.6% 8.4%
 Rolling 20-year return to 31 July 2019 7.3% 8.0%

Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees.

AustralianSuper’s balanced option remains on top of the long-term returns chart, delivering 9.6% p.a. over the 10 years to the end of 31 July 2019, followed closely by Hostplus on 9.5% p.a. and UniSuper on 9.4%.

Top 10 performing funds over 10 years to 31 July 2019


Source: SuperRatings

The SR50 Balanced Index took a dive in the December quarter of 2018, only to rebound strongly through to the end of July 2019. Switching to a capital stable option at the end of December would have meant missing out on $4,384 by the end of July (for a starting account balance of $100,000).

Balanced options have bounced back
(Value of $100,000 invested over 11 months to 31 July 2019)


Source: SuperRatings

“The lesson for investors in the current market environment is that switching in response to short-term market movements is not a good idea,” said SuperRatings Executive Director Kirby Rappell.

Historically, the June quarter is the most challenging period for super, so members might be breathing a sigh of relief. Whether the worst of recent volatility is over remains to be seen, but members have reason to be optimistic. As the chart below shows, the September quarter has delivered an average return of 2.4% over the past decade, compared to the average June quarter return of 0.9%. For growth options and options focused on Australian or international shares, the results are even more pronounced. Australian share options returns have averaged 3.9% in the September quarter and -0.6% in the June quarter.

Average quarterly returns


Source: SuperRatings

“There are certainly some significant challenges facing markets at the moment and investors are forced to deal with a constantly shifting narrative,” said Mr Rappell.

“One of the key challenges facing funds and especially retirees at the moment is record low interest rates in Australia and the continual drop in bond yields. Lower interest rates mean retirees receive less income from annuities while investors start looking for riskier assets to add to their portfolio to generate the desired yield.”

Release ends

 

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

Copyright © 2019 SuperRatings Pty Ltd (ABN 95 100 192 283 AFSL No. 311880 (SuperRatings)). This media release is subject to the copyright of SuperRatings. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth.), no part of this media release may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of SuperRatings. This media release may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to SuperRatings copyrighted material, applies to such third party content.

Super funds have had a convincing finish to what was a bumpy 2019 financial year, with an improvement in sentiment and a rallying share market in June helping funds over the line with solid returns.

A promising 2.0% gain in the September 2018 quarter seemed to vanish before members’ eyes as funds suffered a 4.7% loss in the December quarter. Funds fought back strongly in the final six months, helped by a solid performance in June, bringing the FY19 result to 6.9%.

According to SuperRatings’ data, the median balanced option returned 2.3% in June, driven predominately by a rebound in Australian and international share markets. By comparison, the top 10 funds achieved an average return of 8.5% for the year. The return for the median growth option, with two thirds of the portfolio allocated to local and international shares, was 7.4% over the year, while the median capital stable option returned 5.3%.

While funds have ridden the wave of market fluctuations since the Global Financial Crisis, the FY19 financial year has nevertheless proved a fitting bookend to super performance over the past decade, during which the superannuation system has amassed an additional $1.3 trillion for members.

Median balanced option financial year returns since introduction
of compulsory SG

* Interim return

Source: SuperRatings

Australia’s leading super funds in 2018-19

UniSuper was the highest returning balanced option over the 12 months to 30 June 2019, delivering a 9.9% gain to members. This was followed by QSuper and Media Super, which returned 9.7% and 8.8% respectively. Both UniSuper and QSuper are among the top returning funds over 10 years, narrowly trailing AustralianSuper, which remains on top of the long-term leader board with a return of 9.8% p.a.

Top 10 returning super funds over 1 year

Source: SuperRatings

Top 10 returning super funds over 10 years

Source: SuperRatings

“UniSuper was a standout performer for the 2019 financial year, and they have also delivered consistently strong outcomes for their members over the past 10 years,” said SuperRatings Executive Director Kirby Rappell. “While year-to-year performance can fluctuate, the ability of the fund to provide solid returns over the long term, while protecting their members’ savings against the ups and downs of the market has been key to their success.”

While superannuation continues to deliver for members, SuperRatings warned that the system could become a victim of its own success, as higher account balances mean members will feel more of the bumps as markets move.

“The 4.7% drop we saw in the December quarter was felt more acutely for someone with a $100,000 balance than one with only $10,000,” said Mr Rappell. “Members should enjoy the strength of returns we’ve seen over the past decade, but as more and more workers enter and exit the system, it’s important that we keep talking about how funds manage market pullbacks and other risks for their members. The uncertainty that many consumers and investors feel at the moment reminds us that super is a long-term game, and members must have an understanding of both risk and return, and the effect they have on their retirement savings.”

High returns are not a free lunch – consumers should understand risk

Most consumers can’t define risk, but they know it when they experience it. For superannuation members, risk can mean the likelihood of running out of money in retirement, or not having enough cash to pay for holidays, car repairs, or an inheritance for their kids.

For a young worker with a relatively low super balance, being exposed to riskier assets is less of a problem – in fact, it can help them accumulate wealth over their working life. However, for members approaching retirement (aged 50 and over), an unexpected pullback in the market can mean the difference between living comfortably and having to cut back in order to get by.

While measuring risk can be tricky, it’s essential to understanding the value that members are getting from their fund. The conversation around risk will become increasingly important as a greater number of people begin transitioning to retirement and drawing down on their super.

Risk can be measured as the degree to which returns fluctuate over time. Members want high returns, but they also want consistent returns. Unfortunately, higher returns often mean taking on more risk, which means returns will be less consistent. The table below shows the top 10 funds ranked according to their risk-adjusted return, which measures how much members are being rewarded for taking on risk.

Top 10 funds ranked by risk and return (over 7 years)

Fund Risk/return ranking1 Return % p.a.
QSuper – Balanced 1 9.5%
CareSuper – Balanced 2 10.4%
Hostplus – Balanced* 3 11.1%
Cbus – Growth (Cbus MySuper)* 4 10.7%
BUSSQ Premium Choice – Balanced Growth 5 9.8%
Sunsuper for Life – Balanced 6 10.5%
Catholic Super – Balanced (MySuper) 7 9.7%
CSC PSSap – MySuper Balanced 8 9.4%
HESTA – Core Pool 9 9.9%
Media Super – Balanced 10 9.9%

1 Risk/return ranking determined by Sharpe ratio

* Interim return

Source: SuperRatings

QSuper’s return of 9.5% p.a. over the past seven years is slightly below the average of 10.1% across the top 10 ranking funds, but it has the best return to risk ratio of its peers, meaning it delivered the best return given the level of risk involved. Funds such as CareSuper and Hostplus were able to deliver higher returns, but for a slightly higher level of risk.

High returns are not a free lunch – consumers should understand risk

Following the introduction of MySuper, which provides a low-cost, ‘set-and-forget’ alternative for members, we have seen lifecycle strategies become increasingly popular. Members starting their working life in a lifecycle product are given a higher allocation to riskier growth assets like shares, which is gradually shifted over to safer assets as they age.

This allows members to benefit from higher risk and return earlier on in their working life, and having more certainty as they get closer to retirement. Approximately one third of MySuper products have some sort of age-based strategy, and tend to be offered by retail master trusts.

The chart below shows how a lifecycle product’s asset allocation changes as members age. For those starting out in the workforce, the allocation to growth assets like equities is high (around 90% for the median fund) and is reduced over time to around 50% by the time the member reaches the age of 60.

Lifecycle vs Single Default GAA

Source: SuperRatings

When assessing the performance of lifecycle products, SuperRatings found there are some retail funds that have improved their position. smartMonday MySuper – Aon MySuper High Growth (11.8% p.a.), ANZ Smart Choice Super – MySuper (10.2% p.a.) and Mercer SmartPath – MySuper (9.9% p.a.) have delivered strong returns over the three years to 30 June 2019 for younger members (in the 1995-1999 cohort), in excess of the not-for-profit median across both single default and lifecycle MySuper products.

Super funds have failed to be rattled by the softening economic outlook, delivering solid returns in April and boosted by market momentum through early May. Despite yesterday’s correction, funds remain on track to beat expectations for the June quarter, which is historically the weakest period of the year.

According to estimates from leading superannuation research house SuperRatings, the typical balanced option return was 1.7% in April, mostly driven by gains in Australian and international share markets. This brings the financial year-to-date return to 5.3%, which remains beaten down due to large market falls in the December quarter.

Members in a growth option have enjoyed an even stronger result, with an estimated median return of 2.1% in April. The typical Australian shares option rose 2.3% while the median international shares option grew by an estimated 3.8%.

Median balanced option returns for April 2019

Period Accumulation returns Pension returns
Month of April 2019 1.7% 1.8%
Financial year return to 30 April 2019 5.3% 6.0%
Rolling 1-year return to 30 April 2019 6.5% 7.8%
Rolling 3-year return to 30 April 2019 8.5% 9.4%
Rolling 5-year return to 30 April 2019 7.6% 8.2%
Rolling 7-year return to 30 April 2019 8.8% 10.0%
Rolling 10-year return to 30 April 2019 8.7% 9.7%
Rolling 15-year return to 30 April 2019 7.7% 8.5%
Rolling 20-year return to 30 April 2019 7.1%

Interim results only. Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees.

It remains to be seen if super funds can maintain their momentum in the final quarter of the 2019 financial year, but there are some dark clouds on the horizon that could dash hopes of a strong finish. Downside risks to the Australian economy, including weak inflation, falling home prices, and tighter credit conditions are taking their toll on consumer confidence, while the return of geopolitical risks in the form of US-China trade negotiations will also contribute to near-term uncertainty.

As the chart below shows, the June quarter has historically been the weakest for superannuation and tends to be a time when investors take profits and rotate out of equities. While markets have been risk-on for the past four months, there are signs pointing to volatility ahead, along with fears that markets have come too far too quickly.

Average option return per FY quarter (2009-2019)

Source: SuperRatings

Based on average per quarter returns over 10 years to March 2019

However, while there are reasons to be cautious, there is no guarantee that history will repeat itself.

“The Australian economy has entered the federal election in a relatively vulnerable position, but it’s not all bad news,” said SuperRatings Executive Director Kirby Rappell.

“We have seen strong performance from super funds since the start of 2019, and there’s no reason why this momentum can’t be sustained through to the second half of the year. But there are certainly risks to the near-term outlook, and members should not expect a bumper year for super returns.”

“Super is a long-term game, and those in the accumulation phase should not be too concerned about market volatility or periods of lower performance.”

Growth of $100,000 balance over 10 years to April 2019

Source: SuperRatings

The positive performance for super funds in April has helped to boost total balances over the ten-year period ending 30 April 2019, with $100,000 invested in the median Balanced option in April 2009 now estimated to have reached an accumulated $220,332. The median Growth option is estimated to be worth $236,587 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,679 and $274,732 respectively. In contrast, $100,000 invested in the median Cash option ten years ago would only be worth $129,835.

Release ends

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.