Category: Newspaper/Blog Articles/Hansard

How to future proof your super

The Australian

3 September 2021

James Kirby – Wealth Editor

If you consider that we have a compulsory system where everybody has to put away 10 per cent of their earnings into a super fund, it’s hard to believe the wider public had no way of comparing their fund’s performance until this week.

The release of the government’s super fund performance figures – and importantly the decision to name and shame the worst funds – is a genuine breakthrough. The trillion-dollar question now is what happens next?

It’s worth picturing what is going to occur when more than a million households will soon receive a letter from their fund telling them the most important investment in their life (outside of their home) is in a ‘dud’ super fund.

We should not be surprised if there is uproar from this unfortunate constituency where people who may not always keep up to date with the super industry will be confused and angry.

What’s more this group of stranded investors is going to get a lot bigger in the near future when the exercise is expanded to include all super funds.

In this first version of the performance assessment 13 funds out of 76 in the MySuper category failed to pass industry standards. (If you want to compare your current super fund and see how it fared alongside the 13 loser funds tagged as ‘underperforming’ then simply go to ato.gov.au and it’s all there under ‘YourSuper comparison tool. The best way to do this is to use your MyGov personal password if you have got one of those.)

Within those funds are big names. There are funds linked with CBA and Westpac along with well known industry funds such as the Maritime Super.

Importantly, the majority of the investors stuck in these loser funds were in so-called retail funds from banks and insurers. As expected, non-profit industry funds which often have trade union links were the overall winners.

So what are you supposed to do if you find you are in a dud fund? Should you contact the fund where some call centre operator will probably read a script telling you things are about to get better.

Should you pull out of the fund and move to one that has a better record. You will have to expect that the fund you pick this year (which will be on the basis of its recent performance) turns out to be just as successful in the future. Remember, statistics strongly suggest the winners of today are rarely the winners of tomorrow.

Or maybe you turn your back on institutional super entirely by opening a self managed super fund.

Top advisers suggested this week there could be a material increase in SMSFs when people realise they are in dud funds.

Perhaps this will happen, but you have to ask, would an SMSF be the right choice for people in this situation? Even if they were capable of running an SMSF would it be economically feasible? You need to digest costs of $3000 a year in fees to make an SMSF really work and that rarely makes sense for anyone with less than around $600,000.

Certainly people are more likely to switch funds if they are seriously worried – we know for example that switching activity inside big funds tripled in the immediate aftermath of the sharemarket crash last year.

What to do?

It just so happens that the super system is about to experience some very big changes that are mostly for the better. In a few weeks time – November 1 – the old arrangements where each successive employer could default workers into a different fund is due to formally end.

Combine this new era of stapled super (where you can choose to take the same fund with you through your working life) together with regular publication of performance tables and we are going to get a much more active super investing public.

This is the perfect juncture to explore the idea of a national super fund – a fund that would be run by the government and very likely managed by the Future Fund.

The idea has been bounced around for some time. However, ‘big super’ – industry or retail – does not want to hear about it. Similarly, Self Managed Super Fund professionals won’t like it because people might surrender their SMSF management to a government fund faster than an institutional fund – especially if it is run by an operation with scores on the board.

To be precise, first the government would have to launch the concept and kickstart a fund. It would then have to put the management of the fund out to tender. Under current circumstances, the Future Fund would simply have to win the mandate because it’s returns are exceptional. Across the spectrum, the worst super funds have been doing about 6 per cent, the best have been doing closer to 9 per cent – the Future Fund has been doing 10.1 per cent.

For the investor the winning aspect of such a plan would be that the regular competition to win the right to manage the money would mean it is always underpinned by the best funds – the Future Fund might not always be top dog.

What we got this week is improved transparency in the superannuation system, but we have not seen substantial improvement in the system itself.

Every investor – the apprentice starting out, the young family with multiple accounts, the older couple petrified of low interest rates – are all still mandated to make a choice.

A national fund would allow them to join a fund that sits above and beyond the current choices.

Seven things we learned from the first superannuation ‘shame file’

The Australian

1 September 2021

James Kirby – Wealth Editor

The government’s debut list of dud superannuation funds offers key pointers to the realities of how your money may be managed in our compulsory system

Not a moment too soon the government has published a long-promised super fund performance table: Specifically the recent outcomes at 76 default ‘MySuper’ funds where 13 funds have failed to reach industry standards. It’s a landmark for super and the scheme is only going to get bigger and better. Here’s what we found out:

1. Brand names mean nothing.

Some of the worst performing funds among the 13 dud funds have been offered by the biggest names in the game. Remarkably, a wing of the nation’s biggest bank is here, the Commonwealth Group Super – Accumulate Plus Balanced fund. Similarly, BT – an operation at the heart of the financial services system and a wing of Westpac – is smack in the middle of the sucker list with Retirement Wrap – BT Super MySuper.

Don’t assume a well known name automatically offers a strong fund.

2. There are losers among both retail and industry super funds

Industry funds are the big winners in our super system over the last decade – especially since the Hayne Royal Commission humbled the big banks and insurance groups. But the new ‘shame file’ has both retail names such as Colonial First State FirstChoice Super Fund along with industry funds like the Maritime Super (MySuper Investment Option) and the LUCRF (Labour Union Co-Operative Retirement Fund) MySuper Balanced fund.

3. Savers inside these funds need to be rescued

The government hopes funds which have been cast among the dud list will improve their game or get taken over by larger entities: This might be wishful thinking. A fund that has lost the confidence of the wider market will find it hard to regain momentum. Meanwhile, though large funds might cherry pick among the losers, there is no guarantee the worst funds will be acquired by bigger operators – there will need to be further incentives to get these dud funds to pack it in.

4. Loser funds always say the same thing

Some years ago when it was extremely difficult to compare super funds The Australian – using figures from the prudential regulator – published an extensive performance table of super funds. For weeks afterwards the worst performing funds complained loudly that the cut off point for performance was unfair. Others claimed that they had done wonderfully well since the day the regulator closed off the exercise, etc. The funds at the bottom of this week’s list are offering very similar explanations in their defence.

5. The comparison tables are free and easy to understand

The Australian Taxation Office has managed to present the performance figures very simply for free to anyone who accesses the tables through the MyGov website using their personal username and password.

Using the system on its debut day, the tables divide the funds between ‘performing’ and ‘underperforming’ – with a very useful 7-year net percentage return and fees comparison attached. What’s more there was no delay, crash or waiting time … hats off!

6. Some funds did not present their numbers

Even among the 76 funds that are examined, the regulator discovered that essential numbers were ‘not available’ among several funds which means an investor cannot make a full assessment: Here’s the funds – Mercer Super Trust (Virgin Money MySuper), Mercer Super Trust (Mercer Tailored CRG MySuper), Super Directions Fund (Water Corporation MySuper), the Retirement Portfolio Service- ANZ Smart Choice Super for QBE Management Services, Australia Post Super Scheme, and Australian Defence Force Super Scheme. For its part Mercer notes the performance test requires more than five years of data, and these two Mercer funds have existed for less than five years. Mercer notes that APRA’s separate assessment has the two funds listed as ‘Pass’.

7. It’s not perfect, but it will do for a start.

There are many failings in this exercise: Splitting funds into ‘performing and underperforming’ is simple and uncomplicated but then the process does not fully account for risk weightings or any scoring on the basis of Environment Social or Governance (ESG) considerations.

This is powerful public shaming: But more than a million investors may now realise they are in dud funds and on that basis alone the means should justify the end.

Failing products

AMG Super – AMG MySuper

ASGARD Independence Plan Division Two – ASGARD Employee MySuper

Australian Catholic Superannuation and Retirement Fund – LifetimeOne

AvSuper Fund – AvSuper Growth (MySuper)

BOC Gases Superannuation Fund – BOC MySuper

Christian Super – My Ethical Super

Colonial First State FirstChoice Superannuation Trust –

Commonwealth Bank Group Super – Accumulate Plus Balanced

Energy Industries Superannuation Scheme Pool A – Balanced (MySuper)

Labour Union Co-Operative Retirement Fund – MySuper Balanced

Maritime Super – MYSUPER INVESTMENT OPTION

Retirement Wrap – BT Super MySuper

The Victorian independent Schools Superannuation Fund – VISSF Balanced Option (MySuper Product)

Failing superannuation funds named and shamed

The Australian

31 August 2021

Cliona O’Dowd – Journalist

More than a million workers have entrusted their retirement savings to a dud superannuation fund, the results of the government’s new performance test show.

The new test, brought in as part of the government’s Your Future, Your Super reforms, reveals that 13 of 76 funds — or 17 per cent of those assessed — failed the crucial evaluation and will now have 28 days to write to their members detailing their failure and suggesting they switch funds to get a better retirement outcome.

The named-and-shamed funds include AMG Super, LUCRF, Colonial First State’s First Choice Employer Super Fund, Maritime Super, Christian Super and Commonwealth Bank Group Super. (See the full list below.)

All up, $56.2bn of 1.1 million workers’ retirement savings are invested in the underperforming funds, Treasurer Josh Frydenberg said.

“As part of the most significant changes to superannuation in nearly 30 years, the Morrison Government is holding underperforming funds to account and strengthening protections for the retirement savings of millions of Australians,” he said.

“Superannuation members can now access a single, trusted and independent source of information to compare superannuation products, including whether they are in an underperforming product.”

The MySuper products were assessed on both investment performance and admin fees. But while the investment portion of the test spanned the past seven years, only the most recent year’s admin fees were included, after a government backflip just weeks ago.

The longer time frame for judging investment performance was to allow funds to target long-term returns and not blame “one bad year” for underperformance, according to the government.

But the last minute change to the admin fees could see some dud funds slip through the cracks, critics argue.

The named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

If they fail again next year, they will no longer be allowed to accept new members. What’s more, the funds aren’t told why they failed: they are simply given a pass/fail mark.

Commonwealth Bank Group Super, the $12bn default fund for staff of the nation’s largest lender, said it failed the test “due to a number of underlying factors”.

These included differences in its investments compared to the benchmark, as well as underperformance of some of our investments.

“Group Super focuses on taking appropriate levels of risk with our investments in order to produce certain returns,” a CBA Group Super spokesperson said.

“Consistent with this, the MySuper Balanced option has delivered on its objectives set by the trustee board, delivering a return of 13 per cent for the 2020-21 financial year and in excess of 7 per cent over 10 years, and with less volatility compared to peers producing a smoother return experience for members.”

The fund’s 13 per cent return last financial year compares to the 20 per cent-plus the best in the industry delivered for their members.

Christian Super CEO Ross Piper said the test didn’t take into account that the fund, which manages $2bn on behalf of its 30,000 members, was one of the fastest growing offerings in the market as Australians increasingly seek out more ethical investments.

“While its intent is positive, its blunt design means all products under a certain benchmark are being tarred with the same brush without consideration for how those returns have been generated and whether the fund is, in fact, delivering far more than just strong long-term financial returns,” Mr Piper said.

Colonial First State CEO Kelly Power said its MySuper product had “narrowly missed” the test benchmark and was confident it would not fail two years in a row.

“We have just announced a further reduction to the administration fee charged on this product of almost $8m per year, effective from October 2021,” she said.

“This means FirstChoice Employer Super will have one of the lowest administration fees of any MySuper product, putting it among the top 10 funds, based on our analysis of recent Chant West data.”

APRA executive board member Margaret Cole said the failing funds had an important choice to make.

“They can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them,” she said.

APRA had intensified its supervision of the failed funds, which will now have to detail to the regulator the cause of the underperformance as well as how it will be remedied.

“Trustees have to monitor their products closely and report important information to APRA – including relating to the movement of members and outflow of funds,” Ms Cole said.

The results of the test should be treated with “extreme caution”, according to super fund lobby group ASFA.

“ASFA has long supported the orderly removal of habitually underperforming products, however some of those called out by this test are in fact good products which have delivered excellent returns to their members over a long period of time,” ASFA CEO Martin Fahy said.

“This is a retrospective, relative performance assessment where the so-called underperforming products are compared against top performing products.

“Any product that falls 0.5 per cent below the median is labelled as failing. What the published test results don’t tell members is why, and by how much, their fund has failed the test.”

Dr Fahy said the results of the test were potentially confusing for consumers. Indeed, a glance at the ATO Your Super comparison website, which lists all MySuper products and the test results, shows that some funds passed despite having higher fees and lower returns than the duds.

IOOF Portfolio Service Super, for example, has an annual fee of $627 and a seven-year net return of 7.38 per cent and passed the test.

But the Victorian Independent Schools Superannuation Fund, with a fee of $577 and a seven-year net return of 7.58 per cent, failed.

“This is the tyranny of benchmarks. They fail to take account of risk, lifecycle, or ESG screening considerations and instead they preference hugging the index,” Dr Fahy said.

Ahead of the results, Maritime Super CEO Peter Robertson called for urgent change of the assessment.

Maritime and other named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

This is potentially giving members bad advice and could lead to people being financially worse off in retirement, Mr Robertson said.

“We didn’t wait for the results of the performance test to investigate better options for our members. They’re already in a new product. Legally it’s the same product but fundamentally it’s the Hostplus pooled superannuation trust.

“Our fund has been assessed on investment strategies and risk overlays that are no longer in place, which have no relevance to future returns for members.”

Industry Super Australia chief executive Bernie Dean said he supported the introduction of “fair and appropriate” annual performance tests. But he pointed to shortcomings in its current form.

“The performance test recently introduced by the Government contains deficiencies that are not in the best financial interests of all super fund members and that will lead to outcomes inappropriately favouring some funds over others.

“This is a matter that ISA will continue to seek to have remedied,” he said.

Failing products

AMG Super – AMG MySuper

ASGARD Independence Plan Division Two – ASGARD Employee MySuper

Australian Catholic Superannuation and Retirement Fund – LifetimeOne

AvSuper Fund – AvSuper Growth (MySuper)

BOC Gases Superannuation Fund – BOC MySuper

Christian Super – My Ethical Super

Colonial First State FirstChoice Superannuation Trust –

Commonwealth Bank Group Super – Accumulate Plus Balanced

Energy Industries Superannuation Scheme Pool A – Balanced (MySuper)

Labour Union Co-Operative Retirement Fund – MySuper Balanced

Maritime Super – MYSUPER INVESTMENT OPTION

Retirement Wrap – BT Super MySuper

The Victorian Independent Schools Superannuation Fund – VISSF Balanced Option (MySuper Product)

Superannuation funds brace for performance test results

The Australian

29 August 2021

Cliona O’Dowd – Journalist

A new performance test for the nation’s super funds has been hailed as a win for workers, but on the eve of the first set of results one fund on the wrong side of the pass/fail line is calling for urgent change.

The prudential regulator will this week release to the public the findings from the first annual test of MySuper fund performance as part of the government’s Your Future, Your Super reforms.

Funds that fail the test will be named and shamed and within 28 days must write to members detailing their failure and suggesting they move their money to alternative products.

The assessment will cover an eight-year time period that allows funds to target long-term returns and not blame “one bad year” for underperformance.

But its outcomes show insufficient regard for recent innovations and improvement, according to the main super fund for the maritime industry, Maritime Super. The fund is one of a handful widely expected to be on the “dud” list.

Maritime chief executive Peter Robertson said the test did not take into account the steps the fund had taken to improve member outcomes and has called for further reforms of the assessment before the fund gets another fail mark next year.

“We didn’t wait for performance tests, we knew we had headwinds with scale and liquidity and cash flow,” Mr Robertson said of the fund’s move to shift its assets under management to Hostplus.

“We’ve been trying to come up with solutions for that (through mergers that haven’t come off). The Hostplus pooled superannuation trust is a great solution for that.”

Maritime has for years languished at the bottom of the performance rankings but in February announced it had entered into a strategic partnership with Hostplus in a move that would see the funds combine investment assets.

The partnership, in effect from April 30, saw Maritime pool its $6bn in assets under management with Hostplus’s $60bn-plus assets. It also gave Maritime access to investment opportunities typically not available to smaller funds, including infrastructure, property, private equity and venture capital.

But the move copped hefty criticism due to Maritime retaining its executive team and board members, which will see it pay out millions of dollars in salaries and fees each year despite no longer investing funds on behalf of its members.

Teaming up with Hostplus, which was last year the best performing fund in the country, has seen Maritime’s return in its MySuper product lift 6.6 per cent between May 1 and August 25.

“It’s probably not the last chapter in our book: there is more likely than not, at some stage in the future, a merger. But we’ve got to simplify the fund first,” Mr Robertson said.

Maritime and other named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

This is potentially giving members bad advice and could lead to people being financially worse off in retirement, Mr Robertson said.

“We didn’t wait for the results of the performance test to investigate better options for our members. They’re already in a new product. Legally it’s the same product but fundamentally it’s the Hostplus pooled superannuation trust.

“Our fund has been assessed on investment strategies and risk overlays that are no longer in place, which have no relevance to future returns for members.”

Maritime is not the only fund caught out by the New Test.

Ethical fund Christian Super is also set to make the list, despite delivering an average annual return of 8.34 per cent over the past 10 years. (The best performing funds have delivered returns between 9 and 10 per cent over the same period.)

While Christian Super is one of the fastest growing funds, and one of only four funds that is 100 per cent ethically screened, it has just $2bn in funds under management, well below the $30bn APRA has flagged is needed to remain competitive in the sector.

The fund is in effect “paying the price for virtue” and will be penalised for its ethical and impact investments when the results come out on Tuesday, one industry insider said.

APRA should be recognising funds that are innovating and improving outcomes for members in their performance test methodology, Mr Robertson said.

Superannuation changes open windows to ‘your money’

The Australian

18 June 2021

Robert Gottliebsen

Most Australians who do not have a self-managed fund and who are accumulating superannuation savings don’t regard super as “their money”.

But, of course, it is very much members’ money and the wide-ranging, long-overdue superannuation changes that were passed by the parliament this week will cover 90 per cent of Australians in accumulation outside self-managed funds, so many more Australians will realise that superannuation is “their money”.

And self-managed funds are also helped.

The opposition to the changes was surprisingly ferocious from both the large retail and industry funds and their employer/union backers (plus the ALP), which indicates that there will be unpleasant surprises in some funds when some of the provisions are put into practice.

The changes would not have been possible but for the fact that Josh Frydenberg has become the first treasurer since Paul Keating to take an active interest in reforming superannuation.

And that is long overdue because superannuation savings are around $3 trillion. But the initial driver of these changes was Superannuation Minister Jane Hume.

What Frydenberg and Hume have done is to open a series of windows so ordinary Australians can see what is happening to “their money”.

And so the first big change is that the online accounts of the superannuation funds will tell members where “their money” is actually invested. They will also learn how much of “their money” is being spent on marketing.

Superannuation funds need to attract new members to maintain economies of scale because members retire, die or simply leave the fund. Accordingly some marketing is important but lavish marketing with executive side benefits will be revealed.

Members will also learn how much of “their money” is being paid to shareholders in the case of retail funds and employer and union groups in the case of industry funds.

The second window that is opened up is the ability to compare performances. At the moment superannuation is like insurance policies —the complexity makes it impossible to compare funds. What the legislation proposes is that if you have chosen, say, a conservative or high-growth fund it will be compared with funds with similar investment policies on a like-on-like basis.

For many Australians the first step in seeing superannuation as “their money” came when, in the pandemic last year, Josh Frydenberg gave them the ability to extract cash. But over the next year or so, when the data is assembled, friends will be able compare investment performance rates simply and straightforwardly over the barbecue.

These two measures will have a dramatic affect on superannuation.

But there is a darker side to superannuation in Australia that has taken too long to be fixed.

When Paul Keating set up the original superannuation structure it was based on a craft employment system and so most unions and their equivalent employer group had their own superannuation fund. So when a person started in the workforce in a coffee shop they joined Hostplus; then they went to Coles or Woolworths and joined a retail fund; if they did work on a building site it was Cbus and so on.

Millions of Australians ended up with savings in many different funds. Some of the amounts were small because the person did not work in that industry for very long. These savings get eaten up by administration, which represents a subsidy by young Australians for older Australians who tend to have a more stable fund.

In some industries such as retail and building it has been actually impossible for the employee to join any other fund. Earlier legislation blocked these cartels but there are still some legacy arrangements.

Apart from these cartel arrangements in most areas it has always been possible for people to consolidate their funds, but it tended not to happen. The new legislation provides that the first fund you join goes with you to the next job and so on. But, of course, you are able to switch should you be unhappy with your first fund, and given it will be possible to compare performances, there will be more shifting.

The government says it will save members $280 million so it would seem for some funds the removal of this subsidy will require costs to be reduced or performance after administrative costs will suffer.

That may be the reason for the ferocity with which the retail and industry funds plus employers and unions tried to stop this very logical and beneficial change to our superannuation industry.

It’s true there are areas of downside. It requires more work for small enterprises and Australian Taxation Office systems are unreliable. But the overall benefits are so huge that it is worth the extra time and ATO risk.

And finally, the area which has been given perhaps the most publicity is the ability of APRA to stop superannuation funds which are performing badly from taking new members, which basically means they go out of business and APRA has the power to enforce that exit.

But the test as to whether a fund is performing badly starts by looking at where the money is invested and so if, totally hypothetically, all the fund’s money was invested in infrastructure then that fund would be compared with the infrastructure assets of other funds.

And if over eight years it was too far below other funds then it would be warned to fix its situation and then a year later action would be taken. And so, a balance fund would be tested on the combination of each of the segments that the fund was invested in. If a person joins a fund that turns out to perform badly they will be alerted and then after nine years they will be told of their fund’s failure.

Two other changes are important.

* The limit on the number of members in a self-managed fund will be lifted from four to six which will make it easier for children and their spouses to join their ageing parents, who may be having fund management difficulty. It confirms the government resolve to maintain a healthy self-managed fund movement.

* Those who withdrew money out of superannuation last year will get the opportunity to increase their non-taxable contributions to cover the gap.

Super funds eye best returns in 24 years

The Australian

17 June 2021

Cliona O’Dowd

Super funds are eyeing their best returns in 24 years.
Super funds are eyeing their best returns in 24 years.

Super funds are on track to deliver the best annual returns in more than two decades, with the median growth fund clocking a 20 per cent return just nine trading days out from the end of the financial year.

The median growth fund returned 1.3 per cent in May, bringing the return for the first 11 months of the financial year to a stunning 19.8 per cent, according to research house SuperRatings.

The median balanced fund, meanwhile, is sitting on a 16 per cent return for the financial year to date.

With markets rising further in June, balanced funds are in sight of overtaking 1997’s 18 per cent return. This would make it the best financial year return since the introduction of compulsory super, according to Super­Ratings.

The gains will also see some of the fastest-paced growth in the nation’s pool of superannuation assets, which totalled $3.1 trillion at the end of the March 2021 quarter.

Since the end of May, the local sharemarket has powered further ahead, gaining 3 per cent to a record high on Wednesday.

Over the past year it is up more than 24 per cent, fuelled by ultra-low interest rates around the world.

The stellar return figures were released hours after wide-­ranging superannuation reforms passed parliament, with Australians now to be “stapled” to one super account through their working life, in a move opponents warn could see millions trapped in “dud” funds.

Before the final vote, Superannuation Minister Jane Hume said the reforms would save Australians “$17.9bn in fees and lost performance over the next 10 years”.

But Industry Super Australia chief executive Bernie Dean criticised the Your Future, Your Super reforms, saying many workers would lose out as a result of the legislation.

“The government was forced to drop a number of ideological proposals and to improve the performance tests for funds, but sadly it stopped short of protecting workers from losing their savings by being stuck in a dud super fund,” he said.

While the median growth fund is on track for a 20 per cent return for the current financial year, the market leaders have fared even better.

The nation’s largest super fund, the $2bn AustralianSuper, recorded a 23 per cent return in its growth option for the 11 months through May. Hostplus’s ‘‘Shares Plus’’ growth offering also returned 23 per cent over the same period, while UniSuper wasn’t far behind with a 21.7 per cent return for the year to date.

As he commented on the strong performance this year, SuperRatings executive director Kirby Rappell was also cautious on the market outlook.

“May is the eleventh month in a row we have seen a positive result for the median balanced fund … While strong performance this year is pleasing, market volatility prevails and we are erring on the side of caution in terms of the future outlook, with equity markets likely to provide investors with a bumpy ride,” he said.

“Further, with rates remaining at record lows, more defensive assets such as cash and bonds have delivered meagre returns, which is impacting retirees’ incomes.”

Fellow research house Chant West has the median growth fund sitting on a 17.5 per cent return for the year to date.

The figures between the two research houses vary slightly due to a difference in assessment criteria for what qualifies as a “growth” or “balanced” fund based on the percentage of ­investments in growth assets. “The past two financial years really have illustrated the strength and resilience of our leading super funds,” Chant West senior investment research ­manager Mano Mohankumar said.

“Despite the massive hit that Covid delivered to financial markets last year, the diversification built into growth funds enabled them to limit the damage, and the small loss of 0.6 per cent for fiscal 2020 was far better than expected.”

With a little over 50 per cent allocated to listed shares, super funds rode the upswing this financial year as markets staged a remarkable recovery.

The cumulative return since the Covid low point in March 2020 was about 25 per cent and funds were now 10 per cent above their pre-Covid crisis highs, Mr Mohankumar said.

Australian and US markets reached record highs in May, with Australian shares jumping 2.3 per cent and international shares rising 1 per cent in hedged terms and 1.2 per cent unhedged.

A strong quarterly earnings season in the US boosted the May performance, while in Britain, confidence was boosted as lockdown measures eased.

In the eurozone, the vaccine rollout gained momentum during the month while restrictions were also eased.

The S&P/ASX 200 on Thursday pulled back from this week’s record high and finished the session down 0.4 per cent following weak overseas leads after Wall Street fell overnight on higher inflation expectations from the US Federal Reserve amid the prospect of sooner-than-expected rate rises.

New, lower-cost superannuation fund era ahead

The Australian Business Review

19 may 2021

Robert Gottliebsen

With one exception, Senator Jane Hume’s superannuation changes make sense and prepare the total superannuation movement for a new era of importance.

That is why initially I was surprised at the ferocity of the opposition. Then the penny dropped.

These changes are going to attract new powerful entrants into superannuation (I detail two starters below) and will hasten its move away from superannuation being a craft-based movement.

This frightens the industry funds because they are based on the craft model, but their excellent overall performance in recent years makes them well prepared.

The one change that Hume proposes that I think is a poor idea is giving government or government bodies the power to stop a superannuation fund investing in a particular security.

Once there is proper disclosure then members are perfectly free to vote with their feet.

Government intervention is likely to create a dangerous precedent. But most of the other changes are long overdue.

For example, we currently have a situation where many people have a multitude of funds because they took on different jobs. Their scattered savings are absorbed in fees, which is a terrible waste.

The new system will see an employee in their first job booking into a fund and staying with that fund in different jobs. Each employer can make a quick check with the Australian Taxation Office to find out the relevant fund or the employee can choose. This is a defined task that the ATO should be able to do well. But I am wary. It will need to be a fast, efficient service.

The employee, of course, can change funds at any time. The alternative of an employee changing funds each time a new job is taken would be horrendously costly to the employee.

At the moment superannuation is not seen as relevant to many young people. But thanks in part to state government actions rents are going to rise sharply and young people will need to find a way to buy their own home. Increasingly in coming years superannuation will be used to help in this first step so it will have a new meaning to the up-and-coming generation.

And of course, although superannuation is important in retirement, a house is even more important.

The second change requires much greater fund disclosure including contributions to owners plus employer and union organisations. Marketing and a vast array of other costs will also be disclosed, along with the portfolio of every publicly available superannuation fund.

Members of superannuation funds will get the same sort of information that is available to self-managed funds. Again, this is a long overdue change because members are entitled to know where their money is invested and how much goes to the owners of a fund, employer groups and unions — it’s their money that is being managed.

And the third major change is more controversial. Funds that don’t match an industry-based criteria may have to merge. The measurement is over seven or eight years and can be tailored to the portfolio structure of the fund. And so, totally theoretically, if a fund had 50 per cent of its money in one class, say infrastructure, the measure will be weighted accordingly. It is possible this will push funds towards indexation, but the simple situation is that funds managers that can’t perform over a long period need to be replaced.

What will become apparent to members of funds is the total cost of running their fund. Most large funds will come in with a cost basis of 0.8 to one per cent, but some will have much higher costs. These prospective extra disclosures are suddenly attracting new entrants into the superannuation race.

The big funds would justifiably believe they can compete, but we are looking at a new era.

The first and biggest new entrant is Vanguard. The giant index-based investing institution has developed a successful business in Australia by attracting small and large investors to low management-cost index-based returns over a wide area of investment alternatives.

It is now planning to enter the superannuation market. Employees can write down Vanguard as their preferred superannuation investment and Vanguard will be shouting from the roof tops that its costs of operations are in the vicinity of 0.2 to 0.3 per cent – well below other funds. It clearly believes there is a lot of business to be picked up.

Another new entrant is known as Flare, which is backed by global investors including KKR, Point72 and Westpac Reinventure. Flare is one of the largest providers of software to manage superannuation and human resource bookkeeping. Its network has exploded in the last 18 months and one out of five Australians who start a new job are enrolled via enterprises using Flare technology.

Flare gives its software free to enterprises but plans to use that software network to market financial services products.

Its first foray into this arena is set to be a managed global superannuation fund for Australians. It expects its costs to be in the 0.5 to 0.6 per cent range – higher than Vanguard – but the Flare fund will contain a managed selection of global investments.

Australian investments will be a comparatively small part. Neither new entrant would have made a move but for the Hume legislation. The fact that two have emerged so quickly indicates that there is more to come.

Superannuation funds eye best annual return since 2013

The Australian Business Review

18 May 2021

Cliona O’Dowd

Super funds are on track for their best annual return in close to a decade as markets straddle record highs, with the March 2020 meltdown now a distant memory.

The median growth fund grew 2.2 per cent over April, bringing the return for the first 10 months of the financial year to 14.7 per cent, according to research house Chant West.

If super funds can hold on to that return for the next six weeks, it will be the highest annual return since financial year 2013, when growth funds surged 15.6 per cent over the year.

“They’ve shown their resilience – as we saw last financial year when they limited the COVID-induced damage to post a small loss of 0.6 per cent – and now they’ve shown their powers of recovery,” Chant West’s senior investment research manager, Mano Mohankumar, said.

“The cumulative return since the end of March last year is about 22 per cent, which is astonishing given the health concerns, disruptions and economic damage caused by COVID-19.”

The median growth fund is also now more than 7 per cent above its pre-COVID crisis high set in January 2020.

Since the introduction of compulsory super in 1992, the median growth fund has returned 8.1 per cent per annum, well above the annual CPI increase over the same period of 2.4 per cent. This means funds have delivered a real return of 5.7 per cent, well above the typical 3.5 per cent target.

“Even looking at the past 20 years, which now includes three major sharemarket downturns – the ‘tech wreck’ in 2001–2003, the GFC in 2007–2009 and now COVID-19 – the median growth fund has returned 6.8 per cent per annum, which is still well ahead of the typical return objective,” Mr Mohankumar said.

Source: ChantWest
Source: ChantWest

Share markets were the main drivers of the fund performance over April, according to Mr Mohankumar.

Australian shares were up 3.7 per cent for the month, while international shares gained 4.1 per cent in hedged terms. The appreciation of the Australian dollar over the period pared the gain back to 3.2 per cent in unhedged terms.

The vaccine rollout in the US, where 70 per cent of the population has now had at least one dose, has been a market confidence booster of late.

“Markets were also boosted by some improving economic data and by President Biden following up his $1.9 trillion fiscal stimulus package with a proposed $2 trillion in infrastructure and manufacturing subsidies. In addition, US companies had a strong quarterly earnings season,” Mr Mohankumar said.

Source: ChantWest
Source: ChantWest

But as funds march toward the end of the financial year, increased volatility and the threat of a correction are never far away.

Last week, a surprise spike in US inflation sent jitters through markets as investors mulled sooner-than-expected interest rate rises in the world’s biggest economy.

Consumer prices rose 4.2 per cent over the 12 months through to April, up from 2.6 per cent in March and well above the 3.6 per cent the market had been expecting. The shock print helped push Wall Street to its steepest three-day decline in seven months.

US stocks started this week on a sour note, ending Monday’s session in the red on continued inflation concerns, but the local market has taken it in its stride, rising in both Monday and Tuesday’s trade as it pushes to get back to its recent record high.

While inflationary pressures build in the US, the Reserve Bank sees only muted inflation risks for Australia in the coming years, allowing it to hold its line on not raising interest rates until 2024 “at the earliest”.

In minutes of its May 4 policy meeting published on Tuesday, the central bank said there was little risk of a wages breakout on the horizon, with plenty of spare capacity in the labour market and firms focused on cost control.

But the inflation jitters that have hit stocks of late pose a risk to the funds invested heavily in the so-called Covid winners.

“The COVID winners and the stocks that have been the best performing in the prior 12 months…there has been a fairly meaningful selloff in them,” Forager Funds’ chief investment officer and founder, Steve Johnson, said.

Afterpay and Xero are among Australia’s large COVID winners that have come unstuck this year amid inflation concerns and the outlook for interest rates and central bank liquidity from bond buying that boosted the valuations of growth stocks in the past year.

Afterpay has nearly halved from its February peak of $158 and is currently trading at around $86.50. That’s still a big jump on the $8.90 it hit in the March market meltdown last year.

Xero, meanwhile, has slumped by 25 per cent from its all-time highs and is currently trading at $118.

In the US, Bell Asset Management’s chief investment officer Ned Bell sees big risks for the “hot” concept stocks that rocketed in the post-Covid environment.

“The big stocks like Tesla, Nvidia, Netflix, Salesforce, these types of names, they’re so overowned, and they trade on these nosebleed earnings multiples. And frankly, I don’t see who the marginal buyer is,” Mr Bell said.

“So those are the names, those extremely expensive names, are the ones that typically derate the most in a rising interest rate environment. And that’s what we’re expecting to see.”

Additional reporting: David Rogers

Superannuation heads for double-digit returns for the year as sharemarket gains

The Australian

21 April 2021

Cliona O’Dowd

Super funds are racing toward double-digit returns for the financial year, after riding investment markets over the past three months to lock in a 3.1 per cent gain.

The median growth fund returned 12.2 per cent for the first nine months of the year and is up more than 2.2 per cent already this month, according to research house Chant West.

With just 10 weeks left until the end of the financial year, a double-digit return is now in sight, Chant West senior investment research manager Mano Mohankumar said.

The figures come as ultra-low interest rates is pushing more funds into equity markets, seeing Australian shares hover just short of record levels, while Wall Street continues to push fresh highs.

“Despite the brief volatility in late February on fears that a stronger than expected economic recovery may result in increased inflation, the March quarter was characterised by optimism around the global rollout of vaccines and a return to some economic normality,” he said.

As the median growth fund return climbs past 14 per cent, the market leaders are powering ahead at an even faster pace. The $80bn Sunsuper and $48bn Hostplus are among those with growth funds sitting on 20 per cent-plus returns for the financial year to date, while the nation’s largest super fund, the $200bn AustralianSuper, isn’t far off with a 19 per cent return.

“Zero interest rates and zero inflation means there’s nowhere else to put your money other than dividend-paying sharemarkets around the world,” Hostplus chief investment officer Sam Sicilia said.

“Institutions can put their money in anything, but the vast majority of people can’t do that, and that’s the wind in the sails of equity markets,” he told The Australian.

Hostplus’ growth fund returned 20.4 per cent to mid-April, while its balanced option is sitting at 16.3 per cent. Sunsuper’s growth option, meanwhile, racked up a 26 per cent return by the end of March, and its balanced option 21 per cent.

Equity markets have powered much of the gains over the past year following the March 2020 market meltdown. Australian shares rose 4.2 per cent in the last the quarter, and have since climbed past 7000 points, while international shares gained more than 6 per cent over the three months through March.

“This game of volatilie equity markets fluctuating will persist until there are alternative places for people to put their money. And I can’t see that (happening) any time soon,” Mr Sicilia said.

Alongside equity markets, unlisted investments including private equity have been the outperformers for Hostplus. The fund has shunned fixed income, favouring to diversify through other, better-returning asset classes.

Bond yields rose over the quarter amid persistent fears of rising inflation. This was reflected in negative bond market returns, Mr Mohankumar said, with Australian and international bonds down 3.2 per cent and 2.5 per cent.

After the “very strong performance” in equity markets in recent months, Tribeca Investment Partners’ portfolio manager Jun Bei Liu is anticipating a more volatile period ahead.

“Quite possibly over the next couple of months we might see a bit of profit-taking behavior. But that’s purely tactical, and whether it’s the tax year-end or anything else, fundamentally, the market looks pretty strong,” she said.

On the prospect of investors choosing to “sell in May and go away” Ms Liu said that would likely be short-lived.

“It could take place but, ultimately, it comes down to whether the economy‘s holding strong or not. So far, every indication is showing it’s doing quite well. So even if we see a weak patch in May or June, we may well see it come back quite quickly in July and August.”

Research house SuperRatings also cautioned Australians to prepare for more volatility in markets even amid the recovery as the jobs market improves and economic activity picks up.

“The March returns data reinforced the success that super has seen in rebuilding from the depths of the pandemic last year,” SuperRatings executive director Kirby Rappell said.

“The real bright spot has been the bounce back in the labour market, which has restored confidence to households and helped reboot consumer spending. The reopening of the economy and the low or zero rates of community transmission we’ve experienced in Australia in recent months have galvanised the recovery.”

The continued strength in share markets has seen the median growth fund put on a further 2.2 per cent in April, in addition to the 12.2 per cent to the end of March, bringing the cumulative return since the end of March last year to about 22 per cent.

“(This) is remarkable given the health concerns, disruptions and economic damage caused by COVID-19,” Mr Mohankumar said.

The median growth fund is now more than 7 per cent above the pre-COVID crisis high reached at the end of January 2020.

While the median growth fund has returned just over 12 per cent in the financial year to date, all-growth fund returns reached 18.7 per cent and high growth returns are at 15.7 per cent. The median balanced fund has returned 8.7 per cent so far this year.

As super funds push toward a strong end to fiscal 2021, the economy has already recovered all of its COVID losses, according to the latest Reserve Bank of Australia meeting minutes.

“Overall, preliminary data suggested that GDP in the March quarter was likely to have recovered further to around its pre-pandemic level, earlier than previously expected,” the minutes from the April 6 meeting said.

Despite the swift recovery, the central bank is unwavering in its bid to keep rates at a record-low 0.1 per cent until at least 2024.

Implications of the Retirement Income Review: Public advocacy of private profligacy?

17 March 2021

Terrence O’Brien

Download the Analysis Paper (AP19) as a PDF

The recent Retirement Income Review (RIR) implies policies that would reduce after-tax returns to super saving, encourage faster spending of life savings and of equity in the family home, and minimise bequests.  Its approach would incline each generation towards consuming more fully its own lifetime savings.

This paper demonstrates the RIR relies on contested Treasury ‘tax expenditure’ estimates that use a hypothetical benchmark that is biased against all saving, but particularly against long-term saving.

The AP reports that the effective tax rate on superannuation earnings is already much higher than the statutory rate. It also presents credible alternative Treasury measures that use a neutral benchmark. These estimate ‘tax expenditures’ that are only one-fifth the size the RIR claims, essentially flat over time rather than rising strongly, and thus do not unduly favour self-funded retirees compared to Age Pensioners.

The RIR implies policies should encourage faster and more complete consumption of superannuation capital and housing equity in retirement to prevent some retirees’ wealth rising and ending in bequests.  But with savers’ equity in their houses typically about double their savings in superannuation, no prudent acceleration of super spending is likely to overtake inflation of housing prices in an era of fiscal and monetary stimulus and asset price inflation.

The RIR proposes that a retirement income of 65-75% of the average of after-tax incomes in the last 10 years of work would be “adequate” for all, and estimates most (except some retiring as renters) are already saving more than enough for such a retirement.  But it would be unwise and unnecessary for government to set its policies to constrain citizens’ choice of the self-funded living standards they want to work and save towards.  Policies to crimp voluntary saving and accelerate retirement spending would create more uncertain retirements and a more fragile economy, more dependent on international lending and investment.

This paper was first published on 17 March 2021 by The Centre for Independent Studies (Analysis Paper 19)

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