Many superannuation fund members are losing out because their super funds are adopting investment strategies that are too conservative, says actuaries Rice Warner.

“We consider that many superannuation funds are too conservative with the portfolios for their account-based pensions.”

“Such funds focus on minimising short-term negative returns but do so by reducing overall investment returns – and the future retirement benefits,” a recent report from the group said.

Rice Warner research chief, Nathan Bonarius, told The New Daily that two factors had driven many super funds to take more conservative positions.

“The catalyst was the confluence of the GFC (global financial crisis) and the introduction of MySuper default accounts which followed the Cooper Review (into superannuation in 2010, carried out by former regulator Jeremy Cooper). Many funds redefined strategies to include life cycle approaches.”

Life cycle approaches restructure investment strategies to increase risk in the early years of members’ working lives and reduce it as they age.

Approaches taken by different funds differs widely in their MySuper default options, as the following table shows. One fund, Aon MySuper, includes no risk assets at all in the post-retirement phase while Queensland based Sunsuper, has more than 60 per cent in growth assets at retirement.

Some funds have no risk in the retirement phase. Source: Rice Warner

But while reducing risk in later years can save members from unpleasant shocks, overly conservative strategies in retirement can cut earnings significantly.

“All superannuation pensioners have two primary needs,” Rice Warner’s report says:

• Certainty of cash flows and cash to provide pension payments to meet current consumption (living expenses) and contingencies.
• Growth of their capital so future cash flow is sufficient to meet future expenditure needs no matter how long they live

“Most people who retire at 65 will live for more than 20 years longer. If you have a portfolio with huge cash and fixed interest components then you will make returns of only the rate of inflation at best,” Mr Bonarius said.

“You need to make more than the rate of inflation to ensure your super savings last as long as possible.”

The following chart demonstrates the difference in returns in a retirement fund of $300,00 invested at the 20 year average inflation rate of 2.5 per cent and a return of 2.5 per cent above that rate. While it does not factor in withdrawal of capital over that period, it does demonstrate the investment return differential.

The fund invested at 2.5 per cent would grow to $503,873 over 20 years while the fund invested at double that would grow to $795,989 in that time.

The GFC hit super balances hard and frightened a lot of people who feared they would not have time to recover and made many more conservative.

But Mr Bonarius said  many people have also become blinded to the positives of risk.

“People need to remember that the date you retire is not the date you need to cash in all your superannuation money. You still need it to be earning returns for at least the next 20 years,” he said.

Choosers don’t like risk

Interestingly, people who actively choose investment options are far more exposed to conservative assets than those who let the funds make the call for them, as the following chart shows.

Default settings are less conservative.

The difference may not be as stark as this chart suggests as choosers tend to be older and therefore would be exposed to less risk were they in a default option. Nonetheless the difference in exposures to low returning cash, in particular, is quite stark.

The principal works for small balances as well as big. Mr Bonarius points out that someone relying on the age pension who also gets a $2000 payment from super is boosting their income by almost 20 per cent.

Not-for-profits more risk exposed

The Australian Institute of Superannuation Trustees policy chief, David Haynes, said too much conservatism in later life was undesirable. “We agree that members need to invest on a whole of life basis – that is pre- and post-retirement.”

“Those funds that outperform the benchmark  – notably not-for-profit funds – tend to have a greater weighting to growth assets in recognition that they deliver better long term returns which is critical when we are all living longer in retirement,” Mr Haynes said.

“Maintaining investment in growth assets in retirement can be appropriate for most people, because they can help support higher annual retirement incomes that can last the distance.

” At retirement a female today could expect to live another 22 years  – which is equivalent to more than half of her working life,” said Industry Super Australia CEO David Whiteley.

“It is important to remember the role of the age pension which provides a steady wage indexed income.  Today, the age pension is the major source of income for most retirees,” Mr Whiteley said..

“Growth assets can be more volatile, so the availability of the age pension means in most circumstances there is latitude to have exposure to growth oriented assets in retirement,” Mr Whiteley said.

A significant reason why no-for-profit funds have higher weightings to risk is that the large fund pools across the industry funds sector allows for significant exposures to non-conventional assets like infrastructure, private equity, hedge funds and venture capital.

The New Daily is owned by industry super funds.