The superannuation system is standing up relatively well two months into the coronavirus crisis, with super fund returns strengthening slightly through April after significant falls in March.
The latest figures from Chant West show that the average growth [balanced] fund where most Australians invest lost 9 per cent in the month to March 31 and 10.1 per cent for the March quarter.
While that isn’t good news for fund members, in the context of the financial news elsewhere that has been OK.
RBA governor Philip Lowe on Tuesday predicted unemployment would reach 10 per cent and hours worked would be down 20 per cent by the second half of the year.
Australia’s sharemarket crashed 27 per cent and international stocks 20 per cent from the end of January to the end of March.
But super’s diversified nature meant that the average balanced fund, which has 53 per cent of its assets in shares, bottomed out down 11.7 when the market was gloomiest.
And over April there was some light with balanced funds being up 1.7 per cent by Friday.
Super withdrawals lower
In the first week emergency super withdrawals were available for those who had hit coronavirus crisis conditions, 456,000 people contacted the Australian Taxation Office asking for $4.4 billion of their super savings.
That is still well below the 975,000 who had indicated they would be contenders and well short of the $27 billion the government expects to have to pay out to as many as 1.6 million people.
It’s a far cry from the $50 billion some in the industry observers feared.
While it’s early days, there are signs that super withdrawals will be contained.
“If the trend continues at this level then there will be a lot less withdrawn than we thought,” said Ian Fryer, research chief with Chant West.
To date withdrawals have averaged $8350, below the maximum $10,000 allowable in the first of two tranches that will total $20,000.
“There could be a number of reasons for that,” Mr Fryer said.
“There could be a bunch of young people with only $2000 or $3000 in super who have lost their jobs and withdrawn.
“I think JobSeeker [the measure doubling welfare payments for those losing jobs] made a difference because it made more people take the view that they wouldn’t need to withdraw their super to survive,” he said.
“While there are people with small balances there are also those with, say, $100,000,” Mr Fryer said.
“That means even in funds where a lot of members are stood down or retrenched, their withdrawals [and lack of further contributions] would only amount to 2 to 5 per cent of a fund’s value.”
At those levels the liquidity problems predicted in some funds should not eventuate, Mr Fryer said.
Will super fall further?
That is impossible to know.
If the economy and markets weaken further, then yes it could.
But many funds have already moved to write down the values of unlisted assets like property and infrastructure.
“These revaluations have typically resulted in write-downs of between 6 per cent, 10 per cent for property and infrastructure and up to 15 per cent for private equity,” said Mano Mohankumar, researcher with Chant West.
That move was often made by funds proactively doing valuations outside of the quarterly cycles they usually use.
And it means the return figures for the March quarter are more accurate and it is less likely there will be nasty surprises beyond the stockmarket in the next quarter.
Such reporting is an important equity measure, according to David Knox, partner with superannuation consultancy Mercer.
“Take an unlisted asset worth $100 in December but only worth $80 in March,” Mr Knox said.
“If the valuation is not marked down and someone sold out in March for $100 when the asset was worth only $80 ,then those people still in the fund lose out because they are paying out the person leaving at a higher rate than the assets are worth.
“That leaves those remaining with less money than they should have.”
Play the long game
“Super has had a very sharp fall, which has brought down returns over the last five years,” Mr Mohankumar said.
“If you go back the 27 years compulsory super has existed, then the annualised return is 7.9 per cent.”
“The inflation rate was 2.4 per cent, which means the real return was 5.5 per cent, which is well above the target rate for funds of inflation plus 3.5 per cent,” Mr Mohankumar said.
“Even over 20 years, which includes the ‘tech wreck’, the GFC and COVID-19, annualised returns are 6.2 per cent, in line with the target.”
Given that “we encourage everyone – younger and older – to remember that superannuation is indeed a long-term investment. The vast majority of members can afford to remain patient”.
“We strongly encourage you to seek financial advice before withdrawing money or switching to a less risky option in the current environment,” Mr Mohankumar said.
The New Daily is owned by Industry Super Holdings