Superannuation: Why The News Is Not Nearly So Bad

Sun Herald

Sunday April 6, 2008

Penny Pryor

Yes, the results for this year to June 30 will almost certainly be negative; even the worst for 20 years, but wise fund members will look further, writes Penny Pryor.

Let's start with some unwelcome facts. Your superannuation returns for the current financial year will be, in all probability, negative. There has already been $70 billion knocked off the value of superannuation funds in Australia. We're heading for the worst year since compulsory superannuation was introduced 20 years ago.

It may not be the end of the world - but it is the end of the world as we have known it for four years of a bull market.

Times are definitely tough - anyone working in financial services will tell you that. But don't panic and don't start moving your retirement savings around willy-nilly just because you think you might do better elsewhere.

Superannuation is an investment for the long haul. Even if you're about to retire, changes made to pension rules that came into effect in July last year now make it more tax-effective to draw down a pension rather than take a lump sum. This means that, even after retirement, you will still have time to recover some of these losses.

? TOUGH TIMES

Jeff Bresnahan, managing director of researcher SuperRatings, says the average superannuation fund is down by 6 per cent for the financial year to the end of March. He says it is extremely unlikely that the markets will rebound by enough - more than 10 per cent - for funds to be in the black by the end of the financial year.

"I think we are in for a negative year," he says.

So does our new Minister for Superannuation and Corporate Law, Nick Sherry. He believes it will be the worst year in terms of widespread negative rates of return since 1987, when compulsory superannuationwas introduced.

But superannuation is a long-term investment and the experts say we shouldn't be so concerned about the one-year performance numbers. On average, funds will experience a negative year once every six years.

But if that isn't comforting enough, perhaps this is: longer-term results over the five years are still very strong and, at an average of 11 per cent a year, are still above most funds' target annual rate of 6.5 per cent, according to Bresnahan.

And, let's face it, if you were offered these kinds of returns five years ago you would have jumped at them, even with the current volatility.

? WHAT'S UP

There is, perversely, one almost positive thing about the current superannuation crisis - it is drawing people's attention to their super.

It could even be good - well, maybe not so bad - if it makes people care and therefore put more effort into looking after their nest eggs.

A recent survey conducted for the Australian Institute of Superannuation Trustees (AIST), by IPSOS Mackay found that more than 31.1 per cent care very little or nothing at all about their superannuation and another 52 per cent know only a little.

So don't feel so bad if you don't know where your superannuation fund is invested, how much you have in it or the name of your fund.

Fiona Reynolds, AIST chief executive, believes one of the main reasons for this disengagement, or zero care factor, when it comes to super is because of the constant changes to superannuation law by various governments.

"They felt there wasn't any certainty about retirement policy," she says of the respondents to the survey.

But people also believed they had plenty of time before retirement and therefore could build up their retirement balance. Others thought they had more equity in their house and could live off that in their retirement.

The fact of the matter is we all have to seriously focus on building our superannuation if we want to have a comfortable retirement.

After all, Minister Sherry may have promised the age pension for another 100 years, but $14,000 a year isn't really very much to live on.

? WHERE IS IT?

You may know the name of your superannuation fund but do you know how it is invested?

If, like most Australians, you are in the default - or balanced - option of your fund, 55 per cent of your assets will be in the sharemarket.

That can include international equity markets, where returns can be better or worse than the Australian markets.

The remainder will be split between fixed income, or bonds, property, cash and a small amount will be in things like infrastructure assets, private equity and hedge funds. Reynolds believes many Australians don't know how their superannuation is invested and Bresnahan agrees many will be surprised that their funds are about to have a bad year, even though they are well aware markets have been volatile.

"Most people won't understand why their negative return has occurred. They think super is comparable with cash rates and it isn't," Bresnahan says.

If you don't like the impact that equity markets have on your super returns at the moment, don't forget it's the boom market of the past four years you've got to thank for the previous strong returns.

Even with the volatility we have experienced recently, $100 invested in the local sharemarket 25 years ago would today be worth more than $3000, compared with less than $1000 if you'd invested in cash.

Your fund probably will offer you three or four other investment options but this might not be the time to change. Market rebounds - and they inevitably happen - are usually quick and if you switch into cash or a conservative option now, you will probably miss out on some gains when the better times return.

? COMMUNICATION

Smart superannuation funds may have already been educating you, their members, about their return expectations in their statements to the period ending last December.

This means you won't get such a rude shock come August when you get your final year numbers.

Keep an eye out for quarterly newsletters that will give you some inkling of what's going on as well.

Bresnahan believes that most funds are savvy enough to try to warn their members that their return expectations need to be tempered.

But this will be tough. They've become used to receiving bouquets for the boom year returns and aren't accustomed to the brickbats.

"They need to get to the members first," Bresnahan says.

? RETIREES

The long haul might be all well and good for people who are more than a decade off retirement. But what about those who were planning to retire some time this year and have watched their superannuation balance head steadily south - surely the worst year for super funds in 20 years is going to hurt them? Well, yes, but perhaps not as much as it could have. Changes that came into effect on July 1 last year make it tax-effective to take a pension upon retirement as pension fund returns are tax-free, as is the income drawn from your pension if you are over 60.

"Now there's every reason to leave it in super and draw it down as a pension," Bresnahan says.

What this means is if your super fund also has a pension product, or a transition to retirement pension, you'll be able to leave much of your money within super - and therefore invested - so that, when markets head back up, you'll be able to see your fund balance restored and grow again.

SHARE LENDING

SUPERANNUATION funds invest millions of dollars in shares for their members. These shares are parked with "custodians" for a fee. But these custodians will often offer a discount on this fee if the owner - the super fund - lets them lend those shares out to a third party.

These shares are loaned to hedge funds who want to sell, or "short", particular companies they believe are about to fall in price. The shares are then bought back at the cheaper price and returned, with the hedge fund pocketing the profit. The problem is that hedge funds are deliberately targeting shares of companies to drive their prices lower.

As the share price falls, margin calls may be exercised on investors that have borrowed to buy stock, which sends prices down again. All this, of course, affects the original owner of the shares who finds the value of their investment in the stock has dropped sharply as well. There are currently calls for increased transparency surrounding this practice, with some superannuation funds deciding to cease it until transparency improves.

CASE STUDY

AT 34, John Williams has a few years before he needs his superannuation but the NSW customer retention manager for a telecommunications provider understands that it's something he should start thinking about soon.

"I haven't started making any of my own contributions to superannuation but it's something that's been on my mind," he says.

John is currently with ING Super and has approximately $30,000 to $40,000 in his super, which he doesn't believe will grow to a sufficient amount to support him in his old age.

He says he's aware of the industry superannuation fund commercials and believes it might be a cheaper option for his money but doesn't have the time - or inclination - to research it properly and change his fund.

But John was impressed by his fund's efforts to educate members.

"We recently had someone come in and have a bit of a chat to us about what they're doing with our superannuation. That was the first time any fund I'd been in had done that. To actually, pro-actively, let us know what's happening with our money was great."

He has a very healthy take on the shake-up in share markets. "I've seen a little bit about it but I don't feel like I have any control over it. I don't feel my concern can do anything," he says.

CASE STUDY

ANGELA WLOSZCZOWSKI is 51 and works at a school. She's been employed since she was 17 and, with her accountant husband Zelik, has put four children, the youngest of which is just about to complete high school, through private schools.

Her superannuation funds are split between a self-managed superannuation fund run by Zelik and NGS Super - Non-Government Schools Superannuation Fund.

"I think you have to be very watchful of it and the fund manager so as to make sure your money is being invested wisely," she says.

Retirement is at least 10 years away but she prefers more conservative investments with lower returns but less risk.

"I wouldn't want them to be investing in risky untested shares."

She also likes the diversification of two funds and doesn't like putting all her eggs in the one basket.

But she wants the government to do more for older people who may not have the finances, or inclination, to seek help privately in handling their superannuation.

"There are a lot of people who end up very poorly off," she says.

© 2008 Sun Herald

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