Super funds are on track to finish 2019 with the strongest returns in years, defying fears of a market fade in the final quarter. While market conditions have been challenging, investors have not yet succumbed to the negative economic headlines, which has been good news for super funds.

If momentum holds up through the rest of the year, members in the median balanced option will be looking at an annual return of around 15.0% for 2019 – a result not seen since 2013.

According to leading research house SuperRatings, funds have done a good job of managing uncertainty, which has only been exacerbated by global risks and challenging economic conditions at home. But while consumers are feeling the pinch, their super is holding up well.

A rebounding share market saw the ASX 200 Index return 3.3% in November, putting Australian shares on track to deliver a return of around 26.0% for 2019, which would be the highest investors have seen since 2009. This is despite weakness from the major Financials sector, which slipped 2.0% over the month as the major banks were marked down due to the lower interest rate outlook, while Westpac (-13.1%) was the latest to be hit with negative headlines.

Looking at November’s results, the median balanced option returned an estimated 2.0% over the month, with Australian shares contributing 0.6% and international shares 1.0%, bringing the year-to-date return to 14.8%. The median growth option delivered an estimated 2.3% over the month, bringing the year-to-date return to 17.2%.

Over the past five years, the median balanced option has returned an estimated 7.9% p.a., compared to 8.7% p.a. for growth and 4.9% p.a. for capital stable (see table below).

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

YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SR50 Growth (77-90) Index 17.2% 15.2% 10.5% 8.7% 10.4% 8.6%
SR50 Balanced (60-76) Index 14.8% 13.4% 9.3% 7.9% 9.3% 8.0%
SR50 Capital Stable (20-40) Index 8.3% 8.5% 5.5% 4.9% 5.4% 5.6%

Source: SuperRatings

Pensions products have similarly performed well over the course of 2019, with the median balanced pension option returning an estimated 16.3% year-to-date to the end of November, compared to 19.6% for growth and 9.6% for capital stable.

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

YTD 1 yr 3 yrs 5 yrs 7 yrs 10 yrs
SRP50 Growth (77-90) Index 19.6% 17.1% 11.5% 9.9% 11.7% 9.6%
SRP50 Balanced (60-76) Index 16.3% 14.9% 10.0% 8.5% 10.2% 8.8%
SRP50 Capital Stable (20-40) Index 9.6% 9.4% 6.3% 5.7% 6.2% 6.4%

Source: SuperRatings

“We may not have seen the ramp up in shares before Christmas that some were hoping for, but it’s still safe to say that 2019 has been a highly successful year for super funds and their members,” said SuperRatings Executive Director Kirby Rappell.

“It’s been a nervous year for investors, so it’s great to see that super can deliver some much-needed stability and solid returns during this period. There might not be a lot of positive economic news at the moment, but at least super is one story we can all draw some hope from.”

“Since the Royal Commission’s final report at the start of the year, super funds have fought hard to restore members’ trust in the system. We’ve seen good funds responding proactively to the changing regulatory landscape, which has been pleasing. We expect to see an increase in fund mergers in 2020, but it’s important that regulatory responses don’t move us towards a one-size-fits-all approach, which could be detrimental to member outcomes.”

Members must look beyond raw returns

Everyone agrees that funds that aren’t delivering for members have no place in the super system. However, focusing purely on returns as a measure of a fund’s success ignores a range of factors, not least of which is the level of risk involved in generating that return.

As the chart below shows, there is a significant dispersion of risk and return outcomes among different funds. Looking at how balanced options compare over the past five years, there are some producing higher returns than the median option, but many are producing these higher returns by taking on a higher level of risk (measured as the standard deviation of returns).

Risk and return comparison – Balanced (5 years to 30 November 2019)

Risk and return quadrant - Balanced

Source: SuperRatings

When assessing investment performance over time, the top-left quadrant (higher return for lower risk) is what members should generally aim for. Similarly, the bottom-right quadrant (lower return for higher risk) represents the laggard funds. Over any given time period, there will always be funds that outperform and those that underperform.

Looking at past performance can be useful when picking the right fund, but it shouldn’t be the sole criteria. For one thing, past performance is no guarantee of future performance, but there are many factors members should take into account when assessing a super fund, including insurance, governance, member services, and of course fees.

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.

Conveying the importance of insurance to members is one of the biggest challenges that super funds face. Insurance is often seen as a cost rather than a benefit, especially for younger members, meaning funds need to be in a position to clearly communicate the advantages for individuals and for the system as a whole.

The government’s Protecting Your Super (PYS) package came into effect from 1 July this year and aims to reduce the erosion of account balances through unnecessary fees and costs. Part of the legislation involves the cancellation of insurance for members whose account has been inactive for 16 months or more. Based on early analysis conducted by SuperRatings, it’s clear that the PYS changes will have a significant impact across the industry. For the median fund, around 17% of insured members are expected to lose cover. For the quartile of funds most affected by the changes, this figure rises to over 23% (see table below).

What percentage of insured members have lost cover?
Quartile least impacted 13.7%
Median 17.2%
Quartile most impacted 23.4%

Based on an early analysis of member behaviour, it’s clear that members are more engaged with their insurance than was widely anticipated by the industry. According to SuperRatings, the median expected opt-in rate is around 20%. For a quarter of the industry, almost a third of members are expected to opt in, which is significantly higher than funds’ initial expectations. This suggests that inactive members are perhaps not as disengaged as commonly thought (see table below).

Expected Opt-in Rates
Quartile least impacted 32.9%
Median 20.0%
Quartile most impacted 13.4%

These results highlight the importance of fund communication in helping to convey the benefits of insurance and other member services. A member-centric approach to reinstating cover for members that opt in late is beneficial, with funds typically offering a 60 to 90-day reinstatement period. The provision of advice and insurance calculators will assist members in deciding whether to opt in and whether their level of cover is appropriate.

A variety of strategies have been used by funds over the last year to engage with this cohort of members. While traditional forms of member communications such as direct mail have been used in the past, funds have experienced success with email, outbound calling, SMS and digital marketing campaigns. There has also been significant coverage of these changes in the media, which has led to increased awareness and activity of members wishing to ensure they have the appropriate level of insurance coverage. But what’s clear is that, when presented with a clearly communicated choice, members are likely to engage and take action.

This is the start of the process, and undoubtedly it will be an evolving area that will pose different challenges for funds. A limited number of funds have passed on insurance premium increases, with a number indicating that their insurer has decided to wait and see what the overall impact of PYS and other changes such as the Putting Members’ Interests First legislation will be, and these funds may implement changes in the future. SuperRatings will continue to monitor the impact, but it’s anticipated that there will be upward pressure on insurance premiums as funds and insurers digest the changes.

Funds are operating in a different environment where there are conflicts between regulatory settings and potential claims that will emanate where insurance has been ceased for members. How funds are going to strike an appropriate balance when they’re in a somewhat invidious position will be one of the key themes that SuperRatings tracks in coming months.

This article is based on information from the upcoming Benchmark Report released annually by SuperRatings. The Benchmark Report is based on the most in-depth survey of Australia’s superannuation market, covering investment performance, fees, governance, member servicing, and insurance.

Super members searching for a ‘sustainable’ investment fund are exposed to the same challenges as those in more traditional funds with the sector delivering a wide range of performance outcomes and charging a range of fees, according to new research on the sector by superannuation research house SuperRatings.

The SuperRatings research reveals that the median performance of ‘sustainable’ investment funds is lower than the median performance of the SuperRatings SR50 Balanced (60-76) Index, comprised of traditional balanced super funds. Furthermore, the ‘sustainable’ funds have higher median fees. The combination of the two means a sizeable number of ‘sustainable’ funds produce sub-optimal returns at relatively high fee levels. ‘Sustainable’ funds include funds that select their investments based on environmental, social and governance (ESG) factors.

However, there are a number of ‘sustainable’ funds that outperform the market, while some also have lower fees than many Balanced options. The chart below reveals that the top quartile of sustainable funds charges a total fee of $519 or less per annum on a balance of $50,000, compared to the median SR50 Balanced (60-76) Index fee of $606. Looking at returns, the top quartile of ‘sustainable’ funds has delivered a 10-year return of 8.9% or more per annum, which is in line with the SR50 Balanced (60-76) Index.

Sustainable super fund fees and returns

Sustainable super fund fees and returns
Source: SuperRatings

The below table shows the top returning super funds that are classified as sustainable due to the fund’s incorporation of ESG and socially responsible investing criteria. HESTA’s Eco Pool balanced option has delivered the top return over 10 years of 11.1% per annum, which is considerably higher than the SR50 Balanced (60-76) Index return of 8.9% per annum.

Top performing sustainable super funds

Fund Total fee on
$50k balance
10-year return
(% p.a.)
HESTA – Eco Pool $670 11.1%
VicSuper FutureSaver – Socially Conscious Option $463 10.3%
AustralianSuper – Socially Aware $448 10.0%
WA Super Super Solutions Pers – Sustainable Future $573 9.5%
UniSuper Accum (1) – Sustainable Balanced $281 9.3%
Sustainable Balanced option median $662 8.5%
SR50 Balanced (60-76) Index median $606 8.9%

Returns over 10 years to 28 February 2019
Source: SuperRatings

There are a range of factors that must be taken into account when assessing the extent to which ESG factors affect a fund’s investment decisions, as well as the cost involved. For example, some funds may apply a simple screen on certain industries, while others may conduct more in-depth analysis on individual businesses, which may justify a higher fee. This makes it difficult to provide a definitive ranking of sustainable fund performance.

When considering sustainable alternatives, it is important to look at each individual fund’s mandate, their process for investing sustainably, and of course the industries and businesses they do and do not invest in,” said Mr Rappell.

“When we speak to financial advisers, they tell us that ESG factors are becoming more and more important for their clients. Advisers need the capability to examine and compare sustainable funds to ensure that the product is the best fit for their client both in terms of their risk and return preferences, as well as their social and environmental values.”

Super members have escaped a fifth straight month of negative returns as market volatility turned in their favour over January, helping to claw back losses suffered in late 2018.

The latest data from superannuation research house SuperRatings reveals major fund categories all enjoyed strong growth in the first month of the year. The median return for the Balanced option in January 2019 was 2.5 percent, returning to members more than half of the losses suffered over the prior four months.

Members in the median Growth option enjoyed gains of 3.2 percent for the month, while those in either the median domestic or international equities option had returns of 3.4 percent and 4.5 percent respectively. The effect across all options has been to improve monthly balances after four months of declines, a particularly welcome outcome for those members approaching retirement.

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.

SuperRatings Executive Director Kirby Rappell believes the latest data is a reminder that it is long-term performance that matters for super members and they should not panic in response to a few months of negative performance.

“Volatility remains the dominant trend across markets at the moment”, said Mr Rappell. “However, this time volatility has delivered gains to super members and is a reminder not to panic in response to short-term market movements.”

“A number of factors worked in members’ favour throughout January, including efforts to diffuse the ticking time bomb of a trade war between the US and China. Markets also improved with the end of the longest US government shut down on record.”

Looking forward, super members are also likely to benefit from improved conditions in February to date. In particular, bank stocks have improved as the final report of the Royal Commission failed to deliver as much pain for the sector as many feared.

Growth in $100,000 invested over 10 years to 31 January 2019

Select index

SR50 Balanced (60-76) Index
SR50 Growth (77-90) Index
SR50 Australian Shares Index
SR50 International Shares Index
SR50 Cash Index

Source: SuperRatings

Interim results only

Source: SuperRatings

Interim results

The positive performance for super funds in January has helped to boost total balances over the ten-year period ending 31 January 2019, with $100,000 invested in the median Balanced option in January 2009 now worth $213,227. The median Growth option is worth $227,393 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,722 and $245,403 respectively. Meanwhile, $100,000 invested in the median Cash option ten years ago would only be worth $130,094 today.

Top performing super funds

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.

 

The Royal Commission report will likely be seen as a key fork in the road for the superannuation industry. It highlights a number of issues, many of which have been known to the industry for some time, but more importantly it creates a clear imperative for industry players to take meaningful action to address them. The report and its recommendations cover both historical and structural issues that have been endemic to the industry, such as grandfathered commissions and duplicate accounts, but they also raise potential challenges that if not properly addressed could pose significant risks to sustainability in the future.

The solutions may involve a degree of complexity, and certainly they will not be implemented overnight, but they will be necessary to the future health of the system. Australia’s retirement industry is growing rapidly, and this is bringing greater sophistication but also inevitably additional layers of complexity that is not always easy for funds, members and regulators to navigate. Maintaining as much simplicity as possible while allowing members to benefit from greater innovation and a more dynamic retirement sector is the key challenge. Progress is being made but more needs to be done.

In particular we expect to see structural changes within many retail fund providers as they evolve their models for the future. MySuper product quality filters are expected to be lifted, which should help provide a more effective safety net for disengaged members. At the same time, with the changes in trustee expectations, we will undoubtedly see continued rationalisation in the number of providers in the market through fund mergers.

For consumers, the Royal Commission has highlighted the cost of not being engaged with your super. For many Australians, failing to engage and check in on their retirement savings may already have had an impact on their future retirement outcomes, whether through below-average returns, high fees, duplicate accounts, or inappropriate insurance. For every super member, getting engaged and taking an interest in how your retirement savings are managed is the best thing you can do. Ultimately, the success of superannuation depends on members having a stake in their own retirement.

On the financial advice side, the Royal Commission is proposing some important structural changes that should help create a better deal for advice clients. Combined with new education standards for advisers there should be an ongoing shift in quality, but a key challenge remains the high cost of providing advice, which is ultimately passed on to clients. Will financial advice become a luxury that only the few can afford, or can the industry evolve so that all those exposed to capital markets through their super can access affordable advice? This is a critical question and one that will require a balanced approach to ensure that members can get the certainty and comfort they need in retirement.

With a federal election due this year, and an early budget pegged for early April, the path to implementing these changes should become increasingly clear. The Royal Commission has revealed the deep desire Australians have to fix the system, but it is up to us to work through the changes. We have an opportunity to make real and lasting improvements that will make super more sustainable and hopefully create a better value proposition for members. But we cannot ignore the complexity of the task ahead. Success will mean balancing a number of competing goals – including cost, sophistication, choice and simplicity – while ensuring members understand what they need to do to get the most value from their super.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry is mandatory reading for all super funds and their Trustees. It provides clear guidelines about the sale of financial advice and the purpose of MySuper products, as well as the simplification of insurance and more stringent benchmarking of service providers. This will result in a sweeping focus across organisations to ensure that strategic plans and KPIs are appropriately aligned and managed. The report clearly reinforces organisational responsibility as front and centre in the solution.

The impact of the Royal Commission for many in the industry will be lasting. The key takeout for many industry participants should be that most providers face challenges in some shape or form. We believe the true test of an organisation will be; if another commission (hypothetically) were to be held in 5 or 10 years’ time, will providers have had the foresight to seek out the issues of tomorrow and solve them, or will they be doomed to repeat the mistakes of the past.

We have identified three key areas highlighted in the report, which we believe will substantially shape the industry going forward.

1. Greater accountability for Trustees

With further consolidation across the industry inevitable, Trustees will need to have the processes in place to appropriately consider potential merger opportunities and ensure they are making decisions from a position of “best interests” and not “power/control”, or face being held accountable.

Further to this, the issue of appropriately assessing service providers, whether they are related to the entity or not, and holding them to account will also be vital in delivering optimal member outcomes. This will require ongoing uplift and oversight of service providers, to ensure that value is being delivered at all times.

For those Trustees that fail to adhere to their best interest duties, the Commissioner recommends the application of civil penalties. The challenge for funds, and their Trustees, will be on how to structure appropriate KPIs and remuneration structures, especially at Board and senior management levels, and whether they will have the capacity to deliver services with reasonable care and skill.

2. The challenges of assigning one default account

The report highlights the strong need for the industry to converge to its true membership base. SuperRatings remains supportive of one default account being created upon entry into the workforce, which we also highlighted in our submission to the Productivity Commission’s review. However, this is a deceptively complex challenge.

The report does not explicitly state what ‘machinery’ would be developed to ‘staple’ a person to a single default account. We believe there are three main approaches that could eventuate and note that each is not without substantial administrative and implementation challenges. Thus, it is not surprising that despite broad agreement across the industry, this initiative is yet to be executed. We envisage that an:

1. Employee could be defaulted into a fund attached to their first employer, with that becoming their superannuation fund for life. This could result in significant concentration of default flows to a handful of providers;

2. Employee could elect a superannuation fund when they apply for a TFN. Employees at this age may lack the skills to make an appropriate decision, so advice or guidance would be paramount;

3. Employee could continue to be defaulted into a fund attached to their employer, but a rollover of their existing accumulation account to the new super fund would need to occur each time their employment changed. This would increase the administration burden borne by superannuation funds but could expose employees to different superannuation providers throughout their working life.

Options 1 and 3 would still see the corporate play a role in determining a default super fund when arguably they don’t want the burden. Option 2 removes corporates from the decision-making process, but this option could spell the end of corporate super as we know it, and with it, the benefit of tailored solutions which are in the members’ best interest.

3. Key implications for Corporates

The report recommends ‘no treating’ of employers, this is effectively the corporate version of no hawking.  As such, funds will need to examine how to appropriately attract and service employers.

If corporates continue to nominate a default fund, the selection of this fund will need to be based on a robust framework. In lieu of set guidelines from the government, an assessment in-line with the member outcomes framework would be a potential minimum standard. We remain focused on the importance of reviewing investments, fees, advice, administration and governance arrangements as the pillars of a strong assessment of any fund.

The pricing models in this area should also give corporates pause for thought.  Reflecting on the commentary about the charging models for advice and mortgage broking, a range of pricing structures also exist in the corporate tender management space. Evidently, we believe best practice pricing in this space is an up-front fixed fee model. While this is a cost for corporates, we believe it brings significant long-term benefits for their employees that outweighs the initial cost.

Final thoughts

While the report may have lacked the theatre of the hearings, it has been clearly designed to address key issues identified by the Commission. As noted at the outset, we believe the key takeout for many industry participants should be that most providers face challenges in some shape or form. What providers do about them is the true test.

We are seeing providers act in advance of legislative change wherever practical, which is pleasing to observe. However, the path ahead for some will be more challenging than others. As historical issues are addressed, it will hopefully also provide an industry less divided across historical battlelines. Given the path forward in advice remains one of the most tricky to foresee, we hope that this will provide a key opportunity for these sectors to more effectively work together.

Super members suffered sharp declines in December 2018, pushing many into negative territory for the year, with the likelihood of further losses over coming months as market volatility and political risk continue to challenge the outlook.

The latest data from superannuation research house SuperRatings, reveals major fund categories all suffered declines in December 2018, contributing to an already horror fourth quarter. The median return for the Balanced option in December was -1.2 percent, contributing to a loss of nearly 5 percent for the quarter (-4.7%) but keeping members just above water for the year, with a gain of 0.6 percent.


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.

Members in the median Growth option or exposed solely to domestic or international equities were not as fortunate. Growth option members suffered a -1.7 percent decline in December and -0.3 percent for the year, as heavy losses in the fourth quarter clawed back earlier gains. Members in the median Australian Shares option experienced declines of -0.9 percent in December and -3.4 percent for the year, while the median International Shares option recorded a loss of -3.9 percent for December and -1.7 percent for the year.

SuperRatings Executive Director Kirby Rappell believes the latest data will be a cause for concern for many super members but argues it’s important to keep a long-term perspective.  “For many super members 2018 will be remembered as a turning point”, said Mr Rappell. “Volatility is likely to be a feature of markets over the coming months and members can expect ongoing fluctuation in returns”. “However, it’s important to keep a long-term perspective and recognise that super returns have been overwhelmingly positive over the last decade.”

Despite the declines, super members remain well ahead over a ten-year period, with $100,000 invested in the median Balanced option in December 2008 now worth $204,264, while the median Growth option is worth $215,051 over the same period. Those invested in domestic and international shares have performed even better over the last ten years, despite a more volatile 2018 with $100,000 invested in the median Australian Shares option in 2008 now worth $227,120 and the median International Shares option rising to $233,166 over the same period. Meanwhile, $100,000 invested in the median Cash option ten years ago would only be worth $130,306.

Growth in $100,000 invested over 10 years to 31 December 2018

As we enter a more challenging investment environment, the importance of reviewing your superannuation fund to ensure it is in line with your retirement objectives is paramount.

Release ends

Synopsis of SuperRatings’ views regarding the Productivity Commission’s final report Superannuation: Assessing Efficiency and Competitiveness:

SuperRatings supported the need for a review of the current system and we engaged with the Productivity Commission by providing data and insights, including a formal submission regarding the draft report at that time.

Our submission focused on areas where we foresee implementation issues that could potentially present challenges. As a general principle, we support initiatives that:

  • ensure unintended multiple accounts are consolidated;
  • make it easier for members to engage with their superannuation;
  • provide simple, easy to use tools and information to help inform members;
  • improve member outcomes;
  • require funds to demonstrate how they are providing quality member outcomes; and
  • improve MySuper requirements.

Our responses to the key recommendations and findings were as follows…

Recommendation 1: Defaulting only once for new workforce entrants

  • SuperRatings supports the recommendation of creating a default account only for members who are new to the workforce or do not already have a superannuation account and do not nominate a fund of their own.
  • We note that the proliferation of member accounts has been the catalyst for a number of issues, which persist within the superannuation system such as balance erosion due to multiple insurance policies and account keeping fees.
  • We agree that a centralised system is needed to facilitate this change. A centralised system will remove some of the administrative burden for members seeking to consolidate their superannuation accounts and improve efficiency of the process.

Recommendation 2 and 3: ‘Best in show’ shortlist for new members and independent expert panel for shortlist selection

  • We do not believe that the overall approach covered by recommendations 2 and 3 is workable in practice.
  • One of the key considerations is the role of government in directing the superannuation system. We believe that there would be clear risks involved if the Australian Government, either directly or indirectly, were seen to be endorsing specific products for selection by consumers.
  • SuperRatings has more than fifteen years of experience as one of Australia’s leading providers of information about superannuation funds to fund members, employers and trustees. During this time, we have gradually evolved a sophisticated approach to rating and comparing a range of superannuation products.
  • As a result, we also have an appreciation of the practical challenges involved in creating lists of rated products and explaining our ratings to consumers, product providers and other interested parties.
  • The “Best in Show” shortlist recommendation also has unintended consequences for employer-sponsored corporate funds. We assume that the intention of the Productivity Commission’s recommendation is to publish a list of funds that could be joined by any new employee in any occupation or industry, i.e. those classified as “Public Offer” funds.
  • However, based on SuperRatings data, we note that in the past some of the best performing funds have been “Limited Public Offer” funds.

Recommendation 4: Elevated MySuper and Choice outcomes tests

  • SuperRatings support the Productivity Commission’s recommendations for strengthening the MySuper authorisation and have long held the view that the emphasis placed on size alone should not be the key determinant when assessing the viability of a fund.
  • Our in-house analysis suggests there are examples of good small funds delivering quality member outcomes in a cost controlled manner, helped in part by their ability to know and understand their demographic.
  • Conversely, there are examples of larger funds for whom demonstrating quality member outcomes may not be as easily attainable despite the potential size benefits.

Recommendation 5: Cleaning up unintended multiple accounts

  • We are supportive of legislation to ensure that unintended accounts are sent to the ATO once they meet a definition of ‘lost’. Policies that aim to reunite members with any existing superannuation accounts are a positive step towards reaching the true level of membership across the industry.
  • Whilst we support auto-consolidation of the aforementioned accounts by the ATO, a framework addressing trustee reporting requirements is essential to ensure that any unnecessary processing delays are avoided and that funds are allocated into the member’s most appropriate account.
  • In relation to the transfer of accounts from Eligible Rollover Funds (ERFs) to the ATO and prohibiting further accounts from being sent to ERFs, we believe further information would be useful regarding investment of ATO-held super, fees and charges for ATO-held super and governance of ATO-held super.

Finding 3.7: Association between fees and returns

  • SuperRatings does not ascribe to the view that higher fees are clearly associated with lower net returns over the long term. Superannuation products levy a variety of fees and charges, some of which may ultimately add to retirement balances.
  • For a number of providers with a high investment fee, it can be attributed to allocations to higher cost asset classes, which have been a key reason for their consistently strong performance outcomes for members.

There has always been an element of tension between super funds and financial advisers. From the super fund’s perspective, the adviser is a possible threat to member retention and can disrupt the fund’s engagement process. For the adviser, the super fund can sometimes seem like a closed shop, unwilling to give up control of the advice experience or shed any real light on its investment process, structures and strategy. At face value, the two should be natural enemies.

While there will inevitably be some antagonism between the two, the reality is that both funds and advisers need each other – now more than ever before. In a post-Royal Commission environment, the most successful super funds will be those that actively engage with third-party adviser networks, giving their members the flexibility to choose how they access financial advice. For advisers, success means rising to the challenge of ever higher standards and increased scrutiny, which requires them to have the information and tools to justify investment decisions based on their client’s best interest.

Finding a common path will require a big shift in thinking but the rewards will be more sustainable growth for funds and advisers, as well as better member outcomes. With the median fund currently providing one financial adviser for every 14,230 members, the ability to access scale is crucial for future growth. Third party advice networks facilitate greater reach through their advice channels, while concerns over quality control can be managed through the delivery of accurate and timely information to advisers and dedicated monitoring.

While funds must be prepared to give up some control, advisers will need to work harder than ever to ensure their advice is in their clients’ best interest. The limitations of many advice businesses have been laid bare by the Royal Commission. There will likely be significant turnover in coming years, with more advisers distancing themselves from aligned groups. This provides a significant opportunity to support and build traction within the new advice landscape.

Overcoming the ‘us vs them’ mentality

SuperRatings found that funds with a dedicated strategy focused on servicing third party advice networks have been rewarded with improved member retention, which can aid membership growth. These relationships can be mutually beneficial for funds and advisers, with funds able to service and engage with more members, and advisers able to access a broader client base and a more diversified pool of funds.

Which is why it’s surprising that many funds are yet to fully take advantage of these opportunities. According to SuperRatings’ data, only 53% of Not for Profit (NFP) funds have formal relationships with advisers, which have traditionally been the domain of retail funds through vertically integrated business functions. Even fewer NFPs have a dedicated servicing team for third party advisers – only 27% compared to 79% of Retail Master Trusts (RMTs) – which is essential for enabling advisers to provide a competitive service.

Third party adviser network trends (% of Not-for-Profits)


Source: SuperRatings. Data to 30 June 2017

When it comes to being open and transparent with advisers, super funds also have a lot of work to do. SuperRatings’ analysis shows that only 5% of NFP funds provide data feeds to third party advisers, compared to 73% of RMTs, while 30% of NFP funds (92% of RMTs) provide access to client reports, which enable advisers to provide timely, informed advice to their clients. Funds are also reluctant to allow advisers to transact on behalf of their members, with only 25% of NFPs offering this capability, meaning there are still significant barriers for advisers to effectively engage with funds and provide a streamlined service.

Empowering advisers means more opportunities for funds

Funds and advisers need each other, but how can they go about creating mutually beneficial and trusting relationships? The answer is by sharing information and being transparent about members’ needs. For advisers, this means having access to high quality investment product research that enables them to efficiently assess a wide range of NFP, retail and corporate funds, and ensures they have an in-depth understanding of how each fund stacks up. Equally, super funds need to support this process by giving advisers the information they need to make decisions in their client’s best interest. Transparency is no longer a radical strategy for super funds – it not only reduces friction for the adviser and their client by making it easier to do business, it means that the adviser is in a position to assess the product and consider it for their client. Communicating third party assessments, such as Lonsec’s well recognised investment option ratings, also helps advisers to easily identify and justify high quality superannuation offerings. We expect to see significant changes in funds’ external advice offerings in coming years, particularly as funds continue to report growing success in this area. SuperRatings is supporting this evolution by making its specialised superannuation research available to financial advisers via Lonsec’s market leading iRate platform, giving advisers the tools to make in-depth fund comparisons and ensure that they can fully justify their fund decision on a best interest basis.

With potential risks over default models and concerns about the sustainability of the old model, it is impossible for funds to ignore these opportunities. While funds and advisers might not always see eye to eye, they can’t afford to allow their differences to get in the way of the vast opportunity staring them in face.

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.