The Productivity Commission unveiled a plan Tuesday to crack down on underperforming super funds – a serious problem that it claimed is costing some customers hundreds of thousands of dollars.
But what exactly does it mean for a fund to be ‘underperforming’?
Put simply, performance is the measure of how much bang for your buck you get out of your super fund.
Take last year. In 2017 the average super fund returned just over 10 per cent. In other words, for every dollar invested, the average fund added 10 cents.
Say you put $10,000 into your super fund on 1 January 2017, and on 31 December that had grown into $11,500. That would represent a 15 per cent return, making it a high performing fund.
But say you put the same amount into a different fund, and at the end of the year you had just $10,700. That would represent a 7 per cent return, making it an underperforming fund.
So performance is measured against the average return across the industry. If a super fund returns more than the average, it is high performing. If it returns less than the average, it is underperforming.
Two things influence performance: investment returns, and fees.
How super funds grow your money
The key way super funds grow your money is by investing in ‘equities.’ This is the collective term for investments in company shares.
Money invested in any company listed on a stock exchange – think the big banks, Telstra, Wesfarmers, BHP Billiton, Woolworths etc – is classed as being invested in ‘equities.’
A typical super fund will put around 50 to 70 per cent of your money in equities.
The investments are spread out over a huge number of companies, not just the big ones, to limit the risk. If the odd company here and there fails, it won’t matter too much.
As long as the majority of companies make a profit, return a dividend, and increase in value, then the overall picture looks good.
Another key asset class for super funds is infrastructure – things like toll roads, ports, airports, and so on.
Commercial property – shopping centres, office buildings, etc. – is also a popular asset class for super funds. Both infrastructure and commercial property can provide very reliable, long-term income.
Another asset class is ‘bonds,’ aka ‘fixed income.’ Bonds are essentially IOUs, most commonly from a government, that come with a regular interest payment.
Unlike pension funds around the world – which have massive bond holdings – Australian super funds aren’t huge investors in bonds at the moment.
As for cash, we all know what that is. It is the safest asset class possible, but it does not really grow, meaning you don’t want much of your super there. Funds will usually keep a small percentage of funds – single figures probably – in cash as a buffer against surprises.
Other minor asset classes include ‘private equity’, which is investment in companies that are not listed on a stock exchange; and things like hedge funds, which are too complicated and weird to deal with here.
What should you look for in investments?
The most important measure is long-term performance. When choosing a super fund, look for the fund’s three, five or 10-year performance, and compare it to the average.
A fund with good performance will normally advertise its returns next to the average – so if it doesn’t it’s probably because it doesn’t stack up well.
If you want to know what your fund invests in, decent super funds will have lots of ready information on their website about the sorts of things they invest in. Look for a section on the website entitled ‘investments’ and explore.
Any decent super fund will also have an ethical option for people who don’t want to invest in things like fossil fuels, tobacco, gambling, companies with poor labour standards, and so on.
The other thing to consider is fees. These will be deducted from your super balance, and will therefore eat into your returns.
There are three types of fee to look out for: administration fees, investment fees, and insurance premiums.
‘Administration fees’ are usually flat fees, and cover the costs of running the business and – if your fund is a for-profit ‘retail fund’ – towards company profits.
Investment fees are usually calculated as a percentage of your balance, and go to paying the fees of external investment managers, transaction costs and other expenses associated with investment.
The biggest fee is probably the life insurance premium. Default super funds by law must include life insurance, so this is not a swindle on the part of super funds, as many commentators suggest.
However, it may be that you don’t need life and income protection, in which case you are free to opt out.
Put together, these fees can eat into your super fund, especially when you are not contributing. This is even more of a problem if you have multiple accounts – if you do, for goodness sake consolidate them into one fund right now!
When considering a super fund, make sure it clearly advertises all of its fees and costs. If it doesn’t, it probably has something to hide. The same goes for its investments.
The New Daily is owned by Industry Super Holdings, which is owned by a number of industry superannuation funds.