Apathy pays off for Australian pension fund members

Monday, September 21st, 2009

By Jan McCallum

The recovery of Australian pension funds shows that time as much as timing matters in financial markets.

Every Australian in paid work is supposed to be in a pension fund, known as superannuation in Australia, and they have a choice between company, industry and private funds. At the end of July, Australians had $A1,032 billion invested in superannuation. The system has boosted national savings and financial markets with compulsory deductions flowing into funds for investment every month.

Since Australian workers have traded off pay rises for employer contributions to superannuation over the years and been told they will have to look to their superannuation balance for a comfortable retirement, the impact of the slump in financial markets angered many and led to questioning of the country’s pension system. People about to retire were hit particularly badly and many had to keep working because their savings balance fell by so much.

But patience has paid off, with research firm SupeRatings reporting that employees in multi-employer superannuation funds who chose a balanced investment option were up on average 6.8 per cent in July and August as stock and listed property markets recovered. Over 10 years, their investments have averaged growth of 5.4 per cent a year although they are still down by 7.93 per cent in the 12 months to August 31.

Australians have a choice of investments within their funds, with high growth and low risk options. Low risk is generally aimed at people approaching retirement and carries a higher proportion of cash and fixed interest while younger people can opt for high growth knowing that if stock markets fall one year they have time to recoup their losses. In practice most people go into their fund’s default or balanced option, which gives them a mix of asset classes and will hold between 60 and 76 per cent growth assets.

Many fund members were put into the balanced option by default, because they did not choose an investment option, or decided a range of asset classes was the best choice. The industry bemoans public apathy about superannuation, with many people finding it too complex and continuous regulation adding to the confusion. But doing nothing is starting to pay off as markets recover, with those in the balanced options now starting to get a better return than people who took fright and went into a higher proportion of cash and fixed interest.

SupeRatings managing director Jeff Bresnahan estimates about 80 per cent of fund members are in a balanced option. He has found only 3.3 per cent of pre-retirees moved assets out of an aggressive to a more conservative portfolio in 2008.

"In contrast, retirees were much more active with over 12 per cent of assets moving to conservative options in 2008. Retirees now hold around 14.5 per cent of their super in cash options compared to just 3.7 per cent for pre-retirees."

The retirees, mostly people aged over 65, who moved into cash, have been more likely to miss out on the recovery in stock markets than pre-retirees who did nothing. As Bresnahan points out, "poor market timing can significantly impact benefits."

The six months from September 2008 to February 2009 inclusive yielded six consecutive negative returns for balanced indexes, totaling losses of 18.5 per cent, but since then there have been six consecutive positive months totaling gains of 14.3 per cent.

"This continued volatility has no doubt played havoc with those who have tried to time movements in and out of cash and growth style assets," says Bresnahan.

It is rare that apathy pays, particularly in investment, and in fact apathy tells only half the story. Retirement planning is about long-term investment and the general idea is that with time frames in the decades, the good years will smooth out the bad. The past six months have shown that when stock markets slump, they can bounce back strongly in the following year. That is scant comfort to people who retire in a bad year but the on-going nature of superannuation means it provides regular income after retirement, so they have an opportunity recover losses.

The latest results will not be reflected in the statements going out now for the end of the financial year to June 30, as it will not include the strong gains in July and August. SupeRatings found balanced returns ranged from minus 7.6 per cent at best to minus 24.6 per cent at worst for the financial year. Still, saving for retirement is compulsory in Australia so the funds will keep flowing from people in paid employment and many will be looking for this year for growth in their savings balance.

Superannuation statistics

Total assets: $1,032 billion

Percentage of population

aged over 15 covered: 70.1

Numbers of funds:

Industry 68

Corporate 199

Public sector 40

Retail 168

<5 members 410,996

Source:

The Association of Superannuation Funds of Australia