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Superannuation funds cut ambitions in low-rate world

Super funds are cutting expectations.

Super funds are cutting expectations. Photo: Getty

Australian superannuation funds are scaling back their investment return expectations because of worldwide deflationary conditions and record low interest rates.

The move signals tens of thousands in cuts from expected growth in super balance.

Traditionally funds have targeted a 3.5 per cent return above inflation over a 10-year period. But Kirby Rappell, research manager with SuperRatings, said “funds have set their 10-year return estimates at CPI plus 3.5 per cent”.

“Now some are dialling that back to 3.0 per cent,” Mr Rappell said. “I think its the beginning of a trend. Lots of funds are looking to see if their return targets are appropriate.”

Your fund could be squeezed

That might not sound like a lot, but it is a reduction in return expectations of 16 per cent after inflation is removed from the equation. And over 10 years that would cut expected growth on a $200,000 super balance from $282,030 to $268,700, a reduction of 5.2 per cent.

That leaves a $200,000 fund with $13,330 less in growth over 10 years than if the 3.5 per cent return rate had been achieved. If the fund was $100,000 to begin with, it’s a $6665 growth haircut.

Damian Graham, chief investment officer at advisory group StatePlus, said the lower rate environment is making itself felt in super returns.

“We’ve reduced our return targets by half a per cent for more conservative portfolios (which are weighted to cash and fixed interest). It’s a material change,” he told The New Daily.


The weak outlook for returns in cash and fixed interest was highlighted on Tuesday when the Reserve Bank of Australia cut its cash rate to an all-time low of 1.5 per cent from 1.75 per cent, which was itself a record low.

Inflation has also fallen dramatically, coming in at 0.4 per cent for the most recent quarter and one per cent for the June year. That environment is really slugging super returns.

Low rates mean slim returns

Average super fund returns for the year to June came in at 2.3 per cent, with the industry fund average being 3.45 per cent and the retail fund average 1.74 per cent. If you take the inflation rate away from those figures, returns are looking very slim indeed.

Super funds are responding to the new world of low rates by moving to new investment options.

Infrastructure is attractive to super funds. Photo: Getty

Infrastructure is attractive to super funds. Photo: Getty

Brett Himbury, CEO of IFM Investors, which invests $70 billion for a range of industry super funds and overseas pension and insurance funds, says infrastructure is increasingly attractive because of its higher returns.

Looking for a better option

Six years ago IFM had $7.1 billion, or about 30 per cent of its funds, in infrastructure. Now the figure has ballooned to $30 billion, which is 42 per cent of its $70 billion fund base.

Until recent years infrastructure investment was all through direct equity positions. But now IFM has $15 billion in loans to infrastructure projects where returns are higher than buying bonds.

“In infrastructure debt, we generally look for returns between 200 and 500 basis points above the bank bill swap rate,” Mr Himbury told The New Daily.

In plain English, that means the super funds are earning between four and seven per cent on infrastructure loans. That’s good money when Aussie government bonds might earn them 1.9 per cent, US bonds 1.5 per cent and European paper virtually nothing.

As the table below from SuperRatings shows, in the last few years super funds across the board have been looking to boost returns by investing in infrastructure, which is in the ‘alternative’ category on the chart.

• click on the table for a larger view

Screen Shot 2016-08-03 at 2.31.35 pm

*The New Daily is owned by industry superannuation funds.

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