With investment returns at near record lows for some assets, superannuation returns are suffering and super funds need to resist the temptation to take extra risk to boost returns, Wayne Byrers, chairman of the Australian Prudential Regulation Authority, has warned.

“On every industry we report on, (banking, insurance and superannuation) returns for the year to June 2016 were below their respective 10-year industry average. This was the first time this system-wide outcome has occurred since the crisis period in 2008-09,” Mr Byrers told a regulators’ conference in Melbourne on Friday

“Superannuation fund returns are lower, making retirement savings harder to generate and making fees and costs” more of an issue for members, he said.

While Australian investment returns are higher than many developed countries,” there will inevitably be pressure in the current environment to join the ‘search for yield’, Mr Byrers said.

This pressure will build the longer the low rate environment persists. Rather than big shifts in risk policy likely changes could come “over time in small incremental steps, and each individual step will not be seen to materially change the organisation’s overall risk profile.”

Slow workforce growth will challenge super adequacy, the ASFA Conference heard.

“Small tweaks to investment portfolios designed to chase a few extra basis points of yield,” overly aggressive staff cuts and changes to product design that improve sales volumes by weakening terms and conditions, are areas that need to be watched, he said.

“Like the anecdote about the frog in boiling water, there is a danger no one notices the ever-increasing risk profile until it is too late.  As pressure is applied to find ways to improve returns, it is important that risk considerations remain front of mind.”

“I’m sure we’d all like to avoid becoming boiled frogs,” Mr Byrers warned.

Mr Byrers cited group risk insurance (policies inside super) and mortgage lending standards as two areas where erosion of risk culture had resulted in significant losses in recent years. A strong corporate risk culture is the best defence against such losses, he said.

Beware the ‘frog in the saucepan’ effect. Photo: Getty.

“As important as they are, our best protection against becoming boiled frogs will not be regulatory reforms such as those emanating from Basel, but a strong risk culture within financial institutions that gives appropriate weight to both sides of the risk-return trade-off.

Unlisted assets are an antidote

Ian Fryer, research chief with super consultancy Chant West, said there was little evidence as yet that super funds were boosting risk exposures.

“Some have are cutting their return targets as a result of lower rates.  Some are increasing exposures to unlisted assets that have a lower correlation to market returns,” Mr Fryer said.

Increased exposure to non-listed assets such as infrastructure and private equity was easier for industry funds than their retail counterparts, he said.

“Industry funds have  an advantage in building exposure to unlisted assets because they need less liquidity than retail funds. Retail fund members rely more on investment advisors who can advise them to pull their money out and put it elsewhere. They have more exposure to liquid assets to cover that possibility, ” Mr Fryer said.

Infrastructure can lift returns. Photo: AAP

The Future Fund, set up to cover unfunded Commonwealth superannuation liabilities from 2020, is one fund facing the problem of shrinking returns.

It has asked the government to consider lowering  its CPI plus 4.5 per cent to 5.5 per cent real investment target, given bond markets have been signalling prolonged subdued returns.

Finance Minister, Senator Matthias Cormann, was asked when the government would make a decision on that request in a Senate committee last week by Labor spokeswoman Senator Katie Gallagher

He replied, “(by) the 2017-18 budget. Absolutely. We will have to make a decision one way or the other.”

The New Daily is owned by industry super funds.